A theory of certainty equivalents for uncertain alternatives

Bibliographic Data

ID12166197
AuthorsR Duncan Luce (University of California, Irvine, corresponding author)
Year1992
Volume5
Issue3
Pages201-216
Publication date1992-07-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueJournal of Behavioral Decision Making (JOURNAL)
Journal identifiersISSN: 0894-3257 • E-ISSN: 1099-0771
PublisherWiley (PUBLISHER • GB)
DOI10.1002/bdm.3960050305
OpenAlexW2140619933
LanguageEN
Citations received2
References cited20

Certainty equivalents (CEs) of gambles are assumed to have a ratio scale representation that is strictly increasing in each consequence and the status quo is a singular point. A rank‐ and sign‐dependent weighted linear representation arises as follows. Gambles with both gains and losses are reduced to the formally equivalent binary alternative with the CEs of the subgambles of gains and of losses as consequences. A plausible and partially sustained, but non‐rational, assumption yields a bilinear, non‐additive form. Those gambles composed entirely of gains or entirely of losses are assumed to be rationally edited by subtracting from each consequence the utility of the consequence nearest the status quo and adding that amount to the utility of the modified gamble. A rank‐dependent, weighted average representation results in each domain separately. Because data using judged CEs of binary alternatives exhibit a pronounced non‐monotonicity at the status quo , a version of the theory is given that takes this into account

Arithmetic · Bilinear interpolation · Binary number · Certainty · Combinatorics · Econometrics · Economics · Mathematical economics · Monotonic function · Rank (graph theory · Representation (politics · Sign (mathematics · Statistics · Status quo · Bayesian Modeling and Causal Inference · Decision-Making and Behavioral Economics · Mathematics · Multi-Criteria Decision Making

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