A test of generalized expected utility theory |
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Authors: | Barry Sopher Gary Gigliotti |
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Institution: | (1) Department of Economics, Rutgers University, New Brunswick, N.J., USA |
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Abstract: | In two experiments we test Machina's Hypothesis II (fanning-out). In each experiment we analyze patterns of responses to hypothetical lottery choice questions within a Marschak-Machina triangle. One set of questions involves lotteries on the border of the triangle, an the other set of questions involves lotteries in the interior of the triangle (off the border). Our results show that a large proportion of the observed patterns in the on-border treatment support Hypothesis II, with a considerable amount of fanning-out behavior observed. The patterns observed in the off-border treatment are significantly different from those in the on-border treatment. Hypothesis II performs well in the off-border treatment because expected utility theory itself, which satisfies the restrictions of Hypothesis II, performs well.This is an expanded version of a paper originally prepared for presentation at the Fifth International Conference on the Foundation and Applications of Utility, Risk, and Decision Theories, held June 9–13, 1990 at Duke University, Durham, NC. We acknowledge helpful comments made by participants at that conference, especially those of Mark Machina. |
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Keywords: | Expected utility risk aversion Allais paradox fanning-out |
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