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Expected utility theory with imprecise probability perception: explaining preference reversals

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ABSTRACT This article presents a new model for decision-making under risk, which provides an explanation for empirically-observed preference reversals. Central to the theory is the incorporation of probability perception imprecision,… Click to show full abstract

ABSTRACT This article presents a new model for decision-making under risk, which provides an explanation for empirically-observed preference reversals. Central to the theory is the incorporation of probability perception imprecision, which arises because of individuals’ vague understanding of numerical probabilities. We combine this concept with the use of the Alpha EU model and construct a simple model which helps us to understand anomalies, such as preference reversals and valuation gaps, discovered in the experimental economics literature, that standard models cannot explain.

Keywords: economics; preference; preference reversals; probability perception

Journal Title: Applied Economics Letters
Year Published: 2017

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