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Bias in Utility Assessments: Further Evidence and Explanations

Author

Listed:
  • Eric J. Johnson

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • David A. Schkade

    (College of Business Administration, University of Texas, Austin, Texas 78712)

Abstract

Judgments about simple gambles, such as those used in utility assessment, can generate sizable and systematic bias. After Hershey and Schoemaker (Hershey, J. C., P. J. H. Schoemaker. 1985. Probability vs. certainty equivalence methods in utility measurement: Are they equivalent? Management Sci. 31 1213--1231.), we employ both the probability and certainty equivalence methods to explore bias. Our results show that: (1) the direction and degree of bias depend on characteristics of the assessment gamble such as the reference probability and the difference between outcomes, (2) presenting subjects with explicit anchors can change the size and direction of the bias, and (3) subjects using heuristic response strategies show significantly more bias than those using expectation strategies. We also discuss the status of possible explanations for the bias, in light of these new results, including PE mode reframing, random error, and anchoring and adjustment.

Suggested Citation

  • Eric J. Johnson & David A. Schkade, 1989. "Bias in Utility Assessments: Further Evidence and Explanations," Management Science, INFORMS, vol. 35(4), pages 406-424, April.
    • Handle: RePEc:inm:ormnsc:v:35:y:1989:i:4:p:406-424
    DOI: 10.1287/mnsc.35.4.406
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