Abstract
The response mode bias, in which subjects exhibit different risk attitudes when assessing certainty equivalents versus indifference probabilities, is a well-known phenomenon in the assessment of utility functions. In this empirical study, we develop and apply a cardinal measure of risk attitudes to analyze not only the existence, but also the strength of this phenomenon. Since probability levels involved in decision problems are already known to have a strong impact on behavior, we use this approach to study the impact of probabilities on the extent of the response mode bias. We find that the direction in which probabilities influence measured risk aversion is the opposite in the certainty equivalence (CE) method versus in the probability equivalence (PE) method. Utilizing the CE elicitation approach leads to an increase of risk seeking for gambles involving high probabilities. For the PE method, subjects tend to behave risk averse with gambles of high probabilities. This behavior is reversed in the gain domain. This “tailwhip” effect is consistently replicated in several experiments, involving both loss and gain domains of lotteries.
Similar content being viewed by others
References
Abdellaoui M. (2000) Parameter-free elicitation of utility and probability weighting functions. Management Science 46(11): 1497–1512
Abdellaoui M., Vossmann F., Weber M. (2005) Choice-based elicitation and decomposition of decision weights for gains and losses under uncertainty. Management Science 51(9): 1384–1399
Arrow K. J. (1971) Essays in the theory of risk-bearing. Markham, Chicago
Baucells M., Rata C. (2006) A survey study of factors influencing risk-taking behavior in real-world decisions under uncertainty. Decision Analysis 3(3): 163–176
Becker G. M., DeGroot M. H., Marschak J. (1964) Measuring utility by a single-response sequential method. Behavioral Science 9(3): 226–232
Blavatskyy P. (2006) Error propagation in the elicitation of utility and probability weighting functions. Theory and Decision 60(1): 315–334
Bleichrodt H., Abellan-Perpiñan J. M., Pinto-Prades J. L., Mendez-Martinez I. (2007) Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility. Management Science 53(3): 469–482
Bleichrodt H., Pinto J. L. (2000) A parameter-free elicitation of the probability weighting function in medical decision analysis. Management Science 46(11): 1485–1496
Bleichrodt H., Pinto J. L., Wakker P. P. (2001) Making descriptive use of the prospect theory to improve the prescriptive use of expected utility theory. Management Science 47(11): 1498–1514
Brachinger H. W., Weber M. (1997) Risk as a primitive: A survey of measures of perceived risk. OR Spektrum 19(4): 235–250
Calder B. J., Phillips L. W., Tybout A. M. (1981) Designing research for application. Journal of Consumer Research 8(2): 197–207
Camerer C. (1992) Recent tests of generalizations of expected utility theory. In: Edwards W. (eds) Utility: Theories, measurement and applications. Kluwer, Boston, pp 207–251
Cohen M., Jaffray J.-M., Said T. (1987) Experimental comparison of individual behavior under risk and under uncertainty for gains and for losses. Organizational Behavior and Human Decision Processes 39(1): 1–22
Conlisk J. (1989) Three variants on the Allais example. American Economic Review 79(3): 392–407
Delquié P. (1993) Inconsistent trade-offs between attributes: New evidence in preference assessment biases. Management Science 39(11): 1382–1395
Delquié P. (1997) “Bi-Matching”: A new preference assessment method to reduce compatibility effects. Management Science 43(5): 640–658
Farquhar P. H. (1984) Utility assessment methods. Management Science 30(11): 1283–1300
Fischer G. W., Hawkins S. A. (1993) Strategy compatibility, scale compatibility, and the prominence effect. Journal of Experimental Psychology: Human Perception and Performance 19(3): 580–597
Fishburn P. C., Kochenberger G. A. (1979) Two-piece von Neumann–Morgenstern utility functions. Decision Sciences 10(4): 503–518
Fox C. R., Rogers B. A., Tversky A. (1996) Option traders exhibit subadditive decision weights. Journal of Risk and Uncertainty 13(1): 5–17
Gonzalez R., Wu G. (1999) Nonlinear decision weights in choice under uncertainty. Management Science 45(1): 74–85
Harless D. W., Camerer C. C. (1994) The predictive utility of generalized expected utility theories. Econometrica 62(6): 1251–1289
Hershey J. C., Kunreuther H. C., Schoemaker P. J. H. (1982) Sources of bias in assessment procedures for utility functions. Management Science 8(8): 936–954
Hershey J. C., Schoemaker P. J. H. (1985) Probability versus certainty equivalence methods in utility measurement: Are they equivalent?. Management Science 31(10): 1213–1231
Johnson E. J., Schkade D. A. (1989) Bias in utility assessments: Further evidence and explanations. Management Science 35(4): 406–424
Kahneman D., Tversky A. (1979) Prospect theory: An analysis of decision under risk. Econometrica 47(1): 263–291
Kahneman D., Tversky A. (1984) Choices, values, and frames. American Psychologist 39(4): 341–350
Karmarkar U. S. (1978) Subjectively weighted utility: A descriptive extension of the expected utility model. Organizational Behavior and Human Decision Processes 21(1): 61–72
Lattimore P. K., Baker J. R., Witte A. D. (1992) The influence of probability on risky choice: A parametric examination. Journal of Economic Behavior and Organization 17: 377–400
Loubergé H., Outreville J. F. (2001) Risk taking in the domain of losses: Experiments in several countries. Journal of Risk Research 4(3): 227–236
Maule J., Villejoubert G. (2007) What lies beneath: Reframing framing effects. Thinking & Reasoning 13(1): 25–44
McCord M., de Neufville R. (1984) Utility dependence on probability: An empirical demonstration. Large Scale Systems 6: 91–103
McCord M., de Neufville R. (1986) “Lottery equivalents”: Reduction of the certainty effect problem in utility assessment. Management Science 32(1): 56–60
Oliver A. (2003) The internal consistency of the standard gamble: Tests after adjusting for prospect theory. Journal of Health Economics 22(4): 659–674
Pennings J. M. E., Smidts A. (2000) Assessing the construct validity of risk attitude. Management Science 46(10): 1337–1348
Pennings J. M. E., Smidts A. (2003) The shape of utility functions and organizational behavior. Management Science 49(9): 1251–1263
Pinto-Prades J. L., Abellán-Perpiñán J. M. (2005) Measuring the health of populations: The veil of ignorance approach. Health Economics 14(1): 69–82
Pratt J. W. (1964) Risk aversion in the small and in the large. Econometrica 32(1/2): 122–136
Schoemaker P. J. H. (1982) The expected utility model: Its variants, purposes, evidence and limitations. Journal of Economic Literature 20(2): 529–563
Schoemaker P. J. H. (1990) Are risk-attitudes related across domains and response modes?. Management Science 36(12): 1451–1463
Schoemaker P. J. H., Hershey J. C. (1992) Utility measurement: Signal, noise, and bias. Organizational Behavior and Human Decision Processes 52(3): 397–424
Slovic P. (1995) The construction of preference. American Psychologist 50(5): 364–371
Smith J. E., von Winterfeldt D. (2004) Decision analysis in management science. Management Science 50(5): 561–574
Starmer C. (2000) Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk. Journal of Economic Literature 38(2): 332–382
Tversky A. (1969) Intransitivity of preferences. Psychological Review 76(1): 31–48
Tversky A., Fox C. R. (1995) Weighing risk and uncertainty. Psychological Review 102(2): 269–283
Tversky A., Kahneman D. (1974) Judgment under uncertainty: Heuristics and biases. Science 185(4157): 1124–1131
Tversky A., Kahneman D. (1981) The framing of decisions and the psychology of choice. Science 211(4481): 453–458
Tversky A., Kahneman D. (1991) Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics 106(4): 1039–1061
Tversky A., Kahneman D. (1992) Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty 5(4): 297–323
Tversky A., Sattath S., Slovic P. (1988) Contingent weighting in judgment and choice. Psychological Review 95: 371–384
Tversky A., Thaler R. H. (1990) Anomalies: Preference reversals. The Journal of Economic Perspectives 4(2): 201–211
Tversky A., Wakker P. (1995) Risk attitudes and decision weights. Econometrica 63(6): 1255–1280
Vetschera R. (2007) Preference structures and negotiator behavior in electronic negotiations. Decision Support Systems 44(1): 135–146
von Neumann J., Morgenstern O. (1944) Theory of games and economic behavior. Princeton University Press, Princeton
von Winterfeldt D., Edwards W. (1986) Decision analysis and behavioral research. Cambridge University Press, Cambridge
Wakker P., Deneffe D. (1996) Eliciting von Neumann–Morgenstern utilities when probabilities are distorted or unknown. Management Science 42(8): 1131–1150
Wu G., Gonzalez R. (1996) Curvature of the probability weighting function. Management Science 42(12): 1676–1690
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Schwand, C., Vetschera, R. & Wakolbinger, L.M. The influence of probabilities on the response mode bias in utility elicitation. Theory Decis 69, 395–416 (2010). https://doi.org/10.1007/s11238-010-9193-8
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11238-010-9193-8