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Experimental Assessment of Utility Functions Induced by Fixed and Uncertain Targets

Author

Listed:
  • Maximilian Zellner

    (University of Southern California, Los Angeles, California 90089)

  • Ali E. Abbas

    (University of Southern California, Los Angeles, California 90089)

Abstract

This paper presents the results of four lottery-type experiments that investigate the effects of incentive structures on decision-making under uncertainty. We compare choices made with and without incentives, with fixed targets, with binary targets, and with four-outcome targets that are discretized from a logistic distribution. The results of the behavioral experiments (i) validate theoretical findings of utility functions induced by fixed and uncertain targets. Further, the behavioral results show that (ii) individuals’ choices are indeed affected by incentive structures, which we quantify by several deviation measures. (iii) Defined consistency measures show that choices under uncertain targets become less consistent as the number of uncertain target outcomes increases. The results of these experiments provide insights into the effects of setting incentive structures on decision-making behavior.

Suggested Citation

  • Maximilian Zellner & Ali E. Abbas, 2023. "Experimental Assessment of Utility Functions Induced by Fixed and Uncertain Targets," Decision Analysis, INFORMS, vol. 20(3), pages 187-201, September.
    • Handle: RePEc:inm:ordeca:v:20:y:2023:i:3:p:187-201
    DOI: 10.1287/deca.2023.0470
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    References listed on IDEAS

    as
    1. Ali E. Abbas & James E. Matheson & Robert F. Bordley, 2009. "Effective utility functions induced by organizational target-based incentives," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 235-251.
    2. Dan Ariely & Anat Bracha & Stephan Meier, 2009. "Doing Good or Doing Well? Image Motivation and Monetary Incentives in Behaving Prosocially," American Economic Review, American Economic Association, vol. 99(1), pages 544-555, March.
    3. Robert Bordley & Marco LiCalzi, 2000. "Decision analysis using targets instead of utility functions," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 23(1), pages 53-74.
    4. Robert F. Bordley & Craig W. Kirkwood, 2004. "Multiattribute Preference Analysis with Performance Targets," Operations Research, INFORMS, vol. 52(6), pages 823-835, December.
    5. Ali E. Abbas & James E. Matheson, 2005. "Normative target-based decision making," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(6), pages 373-385.
    6. Wenqing Chen & Melvyn Sim, 2009. "Goal-Driven Optimization," Operations Research, INFORMS, vol. 57(2), pages 342-357, April.
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