WP 2010-10 Is There a Plausible Theory for Decision under Risk? A Dual Calibration Critique

Download Paper

Published in 2013 in Economic Theory, Volume 54, Issue 2.

ABSTRACT. Some theories of decision under risk have been critiqued with varying-payoffs calibration arguments. Such concavity calibration has no implication either for nonlinear probability transformation or for theories with variable reference points. We introduce varying-probabilities calibration that applies to both. The two types of calibrations yield dual paradoxes: a pattern of risk aversion that conforms to the (resp. dual) independence axiom implies implausible risk aversion for theories that are linear in payoffs (resp. probabilities). Theories that are nonlinear in both payoffs and probabilities are subject to both calibrations. We report seven experiments on the empirical relevance of the dual calibration critique.