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The Discrepancy between Risky and Riskless Utilities

Author

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  • Peep F.M. Stalmeier
  • Thom G.G. Bezembinder

Abstract

Utilities differ according to whether they are derived from risky (gamble) and riskless (visual analog scale, time-tradeoff) assessment methods. The discrepancies are usu ally explained by assuming that the utilities elicited by risky methods incorporate atti tudes towards risk, whereas riskless utilities do not. In (cumulative) prospect theory, risk attitude is conceived as consisting of two components: a decision-weight function (attentiveness to changes in, or sensitivity towards, chance) and a utility function (sen sitivity towards outcomes). The authors' data suggest that a framing effect is a hitherto unrecognized and important factor in causing discrepancies between risky and riskless utilities. They collected risky evaluations with the gamble method, and riskless evalu ations with difference measurement. Risky utilities were derived using expected-utility theory and prospect theory. With the latter approach, sensitivity towards outcomes and sensitivity towards chance are modeled separately. When the hypothesis that risky utilities from prospect theory coincide with riskless utilities was tested, it was rejected (n = 8, F(1,7) = 132, p = 0.000), suggesting that a correction for sensitivity towards chance is not sufficient to resolve the difference between risky and riskless utilities. Next, it was assumed that different gain/loss frames are induced by risky and riskless elicitation methods. Indeed, identical utility functions were obtained when the gain/loss frames were made identical across methods (n = 7), suggesting that framing was operative. The results suggest that risky and riskless utilities are identical after correc tions for sensitivity towards chance and framing. Key words: utility assessment; de cision making; risk attitude; framing; risky and riskless utilities. (Med Decis Making 1999;19:435-447)

Suggested Citation

  • Peep F.M. Stalmeier & Thom G.G. Bezembinder, 1999. "The Discrepancy between Risky and Riskless Utilities," Medical Decision Making, , vol. 19(4), pages 435-447, October.
    • Handle: RePEc:sae:medema:v:19:y:1999:i:4:p:435-447
    DOI: 10.1177/0272989X9901900412
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    References listed on IDEAS

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    1. Hogarth, Robin M. (ed.), 1990. "Insights in Decision Making," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226348551, June.
    2. Bostic, Raphael & Herrnstein, R. J. & Luce, R. Duncan, 1990. "The effect on the preference-reversal phenomenon of using choice indifferences," Journal of Economic Behavior & Organization, Elsevier, vol. 13(2), pages 193-212, March.
    3. Fishburn, Peter C, 1989. "Retrospective on the Utility Theory of von Neumann and Morgenstern," Journal of Risk and Uncertainty, Springer, vol. 2(2), pages 127-157, June.
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    4. Schmidt, Ulrich, 2012. "Insurance demand and prospect theory," Kiel Working Papers 1750, Kiel Institute for the World Economy (IfW Kiel).
    5. Einat Neuman & Shoshona Neuman, 2008. "Reference-dependent preferences and loss aversion: A discrete choice experiment in the health-care sector," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 3, pages 162-173, February.
    6. José‐María Abellán‐Perpiñán & José‐Luis Pinto‐Prades & Ildefonso Méndez‐Martínez & Xabier Badía‐Llach, 2006. "Towards a better QALY model," Health Economics, John Wiley & Sons, Ltd., vol. 15(7), pages 665-676, July.
    7. repec:cup:judgdm:v:3:y:2008:i::p:162-173 is not listed on IDEAS
    8. Jose Mª Abellán Perpiñán & Fernando Ignacio Sánchez Martínez & Jorge Eduardo Martínez Pérez & Ildefonso Méndez Martínez, 2009. "The QALY model wich came in from a general population survey: roughly multiplicative, broadly nonlinear and sometimes contex-dependt," Economic Working Papers at Centro de Estudios Andaluces E2009/04, Centro de Estudios Andaluces.
    9. Jose-Luis Pinto-Prades & Jose-Maria Abellan-Perpiñan, 2012. "When normative and descriptive diverge: how to bridge the difference," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(4), pages 569-584, April.
    10. Mohammed Abdellaoui & Han Bleichrodt & Olivier l'Haridon & Corina Paraschiv, 2013. "Is There One Unifying Concept of Utility?An Experimental Comparison of Utility Under Risk and Utility Over Time," Management Science, INFORMS, vol. 59(9), pages 2153-2169, September.
    11. Abellan-Perpiñan, Jose Maria & Bleichrodt, Han & Pinto-Prades, Jose Luis, 2009. "The predictive validity of prospect theory versus expected utility in health utility measurement," Journal of Health Economics, Elsevier, vol. 28(6), pages 1039-1047, December.
    12. Stefan A. Lipman & Werner B. F. Brouwer & Arthur E. Attema, 2019. "A QALY loss is a QALY loss is a QALY loss: a note on independence of loss aversion from health states," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 20(3), pages 419-426, April.
    13. Patrick Hofstetter & James K. Hammitt, 2002. "Selecting Human Health Metrics for Environmental Decision‐Support Tools," Risk Analysis, John Wiley & Sons, vol. 22(5), pages 965-983, October.
    14. José Mª Abellán & José Luis Pinto & Ildefonso Méndez & Xabier Badía, 2004. "A test of the predictive validity of non-linear QALY models using time trade-off utilities," Economics Working Papers 741, Department of Economics and Business, Universitat Pompeu Fabra.
    15. Han Bleichrodt, 2002. "A new explanation for the difference between time trade‐off utilities and standard gamble utilities," Health Economics, John Wiley & Sons, Ltd., vol. 11(5), pages 447-456, July.

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