An Intransitive Expectations-Based Bayesian Variant of Prospect Theory.

Psychological experiments have established that the classical expected utility model appears descriptively inadequate. Viscusi's prospective reference theory attempts to reconcile the expected utility model with many of these experiments by supposing that individuals have prior expectations about the utility they can expect to get from lottery payoffs. Bayesian theory then implies that individuals revise lottery probabilities in light of these prior expectations before choosing among lotteries so as to maximize expected utility. But Viscusi's theory cannot account for nonmonotonic or intransitive behavior. This article develops an extension of Viscusi's model with correlated prior beliefs that does account for nonmonotonic and intransitive behavior. Copyright 1992 by Kluwer Academic Publishers