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On the origin of utility, weighting, and discounting functions: How they get their shapes and how to change their shapes

Stewart, N., Reimers, S. and Harris, A (2015). On the origin of utility, weighting, and discounting functions: How they get their shapes and how to change their shapes. Management Science, 61(3), pp. 687-705. doi: 10.1287/mnsc.2013.1853

Abstract

We present a theoretical account of the origin of the shapes of utility, probability weighting, and temporal discounting functions. In an experimental test of the theory, we systematically change the shape of revealed utility, weighting, and discounting functions by manipulating the distribution of monies, probabilities, and delays in the choices used to elicit them. The data demonstrate that there is no stable mapping between attribute values and their subjective equivalents. Expected and discounted utility theories, and also their descendants such as prospect theory and hyperbolic discounting theory, simply assert stable mappings to describe choice data and offer no account of the instability we find. We explain where the shape of the mapping comes from and, in describing the mechanism by which people choose, explain why the shape depends on the distribution of gains, losses, risks, and delays in the environment.

Publication Type: Article
Additional Information: Management Science. Copyright 2015 INFORMS. http://dx.doi.org/10.1287/mnsc.2013.1853, used under a Creative Commons Attribution License: http://creativecommons.org/licenses/by/3.0/us/.
Publisher Keywords: utility; probability weighting; subjective probability; temporal discounting; delay discounting; stable preferences; decision by sampling; range frequency theory; risky choice; decision under risk; intertemporal choice; decision under delay
Subjects: B Philosophy. Psychology. Religion > BF Psychology
H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
Departments: School of Arts & Social Sciences > Psychology
URI: http://openaccess.city.ac.uk/id/eprint/7799
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