Reconciling introspective utility with revealed preference: Experimental arguments based on prospect theory
Journal of Econometrics , Volume 138 - Issue 1 p. 356- 378
In an experiment, choice-based (revealed-preference) utility of money is derived from choices under risk, and choiceless (non-revealed-preference) utility from introspective strength-of-preference judgments. The well-known inconsistencies of risky utility under expected utility are resolved under prospect theory, yielding one consistent cardinal utility index for risky choice. Remarkably, however, this cardinal index also agrees well with the choiceless utilities, suggesting a relation between a choice-based and a choiceless concept. Such a relation implies that introspective judgments can provide useful data for economics, and can reinforce the revealed-preference paradigm. This finding sheds new light on the classical debate on ordinal versus cardinal utility.
|Cardinal utility, Ordinal revolution, Prospect theory, Risky utility, Strength of preference|
|Microeconomics (jel B21), Criteria for Decision-Making under Risk and Uncertainty (jel D81)|
|Journal of Econometrics|
|Organisation||Erasmus School of Economics|
Abdellaoui, M, Barrios, C, & Wakker, P.P. (2007). Reconciling introspective utility with revealed preference: Experimental arguments based on prospect theory. Journal of Econometrics, 138(1), 356–378. doi:10.1016/j.jeconom.2006.05.025