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ERIC Number: EJ792266
Record Type: Journal
Publication Date: 2008-Apr
Pages: 39
Abstractor: Author
Reference Count: 172
ISSN: ISSN-0033-295X
New Paradoxes of Risky Decision Making
Birnbaum, Michael H.
Psychological Review, v115 n2 p463-501 Apr 2008
During the last 25 years, prospect theory and its successor, cumulative prospect theory, replaced expected utility as the dominant descriptive theories of risky decision making. Although these models account for the original Allais paradoxes, 11 new paradoxes show where prospect theories lead to self-contradiction or systematic false predictions. The new findings are consistent with and, in several cases, were predicted in advance by simple "configural weight" models in which probability-consequence branches are weighted by a function that depends on branch probability and ranks of consequences on discrete branches. Although they have some similarities to later models called "rank-dependent utility," configural weight models do not satisfy coalescing, the assumption that branches leading to the same consequence can be combined by adding their probabilities. Nor do they satisfy cancellation, the "independence" assumption that branches common to both alternatives can be removed. The transfer of attention exchange model, with parameters estimated from previous data, correctly predicts results with all 11 new paradoxes. Apparently, people do not frame choices as prospects but, instead, as trees with branches. (Contains 11 figures, 11 tables and 1 footnote.)
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Publication Type: Journal Articles; Reports - Evaluative
Education Level: N/A
Audience: N/A
Language: English
Sponsor: N/A
Authoring Institution: N/A