Year: 2009
Type: article
Abstract: A standard method to elicit certainty equivalents is the Becker-DeGroot- Marschak (BDM) procedure. We compare the standard BDM procedure and a BDM procedure with a restricted range of minimum selling prices that an individual can state. We find that elicited prices are systematically affected by the range of feasible minimum selling prices. Expected utility theory cannot explain these results. Nonexpected utility theories can only explain the results if subjects consider compound lotteries generated by the BDM procedure. We present an alternative explanation where subjects sequentially compare the lottery to monetary amounts in order to determine their minimum selling price. The model offers a formal explanation for range effects and for the underweighting of small and the overweighting of large probabilities.
Source: Experimental Economics
Authors: Pavlo R. Blavatskyy, Wolfgang R. Köhler
Institution: University of Zurich
Language: English
Subfield: General Decision Sciences
Field: Decision Sciences
Domain: Social Sciences
Open Access status: bronze
Funder: Universität Zürich
OpenAlex ID: W3123634293