Measuring Utility, Destabilizing EUT
Measuring Utility, Destabilizing EUT
Behavioral Economics Begins, 1965–1985
Chapter 16 shows how the validity of expected utility theory (EUT) was increasingly called into question between the mid-1960s and the mid-1970s and discusses how a series of experiments performed from 1974 to 1985 undermined the earlier confidence that EUT makes it possible to measure utility. Beginning in the mid-1960s, in a series of experiments seminal to the field later called behavioral economics, Sarah Lichtenstein, Paul Slovic, Amos Tversky, and others showed that decision patterns violating EUT are systematic. The new experimenters who engaged with the EUT-based measurement of utility from the mid-1970s, namely Uday Karmarkar, Richard de Neufville, Paul Schoemaker, and coauthors, showed that different elicitation methods to measure utility, which according to EUT should produce the same outcome, generate different measures. These findings contributed to destabilizing EUT, undermined the confidence in EUT-based utility measurement, and helped foster a blossoming of novel behavioral models of decision-making under risk.
Keywords: Allais paradox, Ellsberg paradox, Michigan School, certainty equivalence method, probability equivalence method, Uday Karmarkar, probability distortion, Richard de Neufville, Paul Schoemaker, nonexpected utility models
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