Preference Under Risk: An Application of Nonexpected Utility Theories

"Most decisions (political, economic, and social) are made in the context of risk so the subject of human behavior under risk is of interest to several disciplines. Social science researchers who apply experimental methods to study individual or group behavior in such contexts may also want to consider characterizing the risk preferences of experimental participants. The methods discussed in this paper could be used for such purposes. This paper integrates concepts from economics and psychology regarding how to model preference over gambles. A method for measuring risk preference combining revealed preference and nonlinear programming is proposed. A small demonstration of the method was used to compare alternative theories of risk preference. The application reveals contradictions of economic and psychology theories in terms of the assumption of risk aversion and models of the utility function. One particular theory (expected utility with rank dependent probabilities) among those tested seems to provide an adequate model of behavior and thus is recommended for further experimental research."