See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/228302813

A Meta Analysis of the Empirical Evidence on Expected Utility Theory

Article  in  European Journal of Economics, Finance and Administrative Sciences · January 2009

CITATIONS READS
5 377

3 authors, including:

Muhammad Zafar Yaqub

26 PUBLICATIONS   105 CITATIONS   

SEE PROFILE

All content following this page was uploaded by Muhammad Zafar Yaqub on 13 March 2015.

The user has requested enhancement of the downloaded file.

European Journal of Economics, Finance and Administrative Sciences
ISSN 1450-2275 Issue 15 (2009)
© EuroJournals, Inc. 2009
http://www.eurojournals.com/EJEFAS.htm

A Meta Analysis of the Empirical Evidence on Expected

Utility Theory

Muhammad Zafar Yaqub

Center for Business Studies, University of Vienna, Brünner Strasse 72
A-1210, Vienna, Austria
Tel: +43 1 4277 37945; Fax: +43 1 4277 38174
E-mail: mzyaqub7@yahoo.co.uk

Gökhan Saz
Center for Business Studies, University of Vienna, Brünner Strasse 72
A-1210, Vienna, Austria
E-mail: g_saz@hotmail.com

Dildar Hussain
Center for Business Studies, University of Vienna, Brünner Strasse 72
A-1210, Vienna, Austria
E-mail: hussaindildar@yahoo.com

Abstract
The authors have conducted an exhaustive literature survey of the experimental studies on
Expected-utility Theory (EUT) in order to account for the violations of its axiomatic
foundations. Beyond identifying and classifying the (behavioral) bias phenomena according
to the axiom(s)-violated, the possible background conditionals for such violations are
reported in this paper.

Keywords: EU Theory, EU axioms, Behavioral biases, Preference reversal

1. Introduction
Partly owing to the testability feature, the scientific theories have to constantly prove their truthfulness
in the face of critical testing from their rivals (Sekaran, 1984). As a natural consequence of this
process, the theories under examination either get corroborated (in case of finding the supporting
evidence), or these have to undergo some revision(s) in case credible contradictory evidence emerges.
Being no exception, Expected utility theory (EUT), too, had been subjected to such critical
examinations ever since it had been propounded (by Daniel Bernoulli and Gabriel Cramer) in the 18th
century. A number of experimental studies have been conducted to testify the truthfulness of its
axiomatic foundation. Even though results from some of these experiments supported the baseline
axioms, a fairly large number have reported instances where EU axioms have been violated leading to
the discovery of a variety of (behavioral) bias phenomenon. This paper addresses a threefold agenda:
1) to take an account of the EU axioms’ violations, 2) to identify the behavioral biases, and 3) to
explain the background conditionals of these violations and/or biases, as revealed by the previous
studies. We start with presenting a brief note on the evolution of EU Theory in section 1. Section 2
discusses the methodology used to find relevant literature as well as the relevant facts of the matter
118 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

from this literature. Section 3, presents our findings where we discuss the EUT axioms’ violations
along with the nature, origin and background conditionals of the behavioral biases. The final section
concludes the whole discussion. A couple of tables have been presented to show a consolidated picture
of the phenomenon of interest.

2. Expected Utility Theory

In the 17th century, the efforts to describe rational behavior in mathematical terms ran into problems
with the discovery of St. Petersburg paradox. Daniel Bernoulli and Gabriel Cramer were the first to
solve and/or explain the St. Petersburg Paradox in 18th century. The solution to this paradox revealed
that the value of a gamble is not, in general, equal to its expected value. Individuals place subjective
values (utilities) on monetary outcomes and the value of a gamble is the expectations of these utilities
(Bernoulli, 1738). Since Bernoulli’s statement (or theory) was based on a cardinal (interval) utility
scale, it failed to attract much attention of economists (until the 1950’s) who were more keen in
developing ordinal theories. John vonNeumann (a German-Hungarian mathematician) and Oskar
Morgenstern (an Austrian economist) were the first scientists who formally proved that EUT was a
viable theory for rational decision making, and that it can be derived from certain axioms. They
propounded that any "normal" preference relation over a finite set of states can be written as an
expected utility. That is why it is also called vonNeumann-Morgenstern utility. The theory became
important as; 1) it was developed shortly after the Hicks-Allen “ordinal revolution” of the 1930's; 2) it
revived the idea of cardinal utility in economic theory
Although the economic and simple tractability of EUT cannot be criticized, a crucial question is
whether it provides a sufficiently accurate representation of actual choice behavior. Even though most
decision theorists would regard the establishment of the expected utility (EU) paradigm as being the
most important development in modeling behavior under risk and uncertainty, yet it was not long
before other researchers were drawing attention to a number of apparently systematic patterns of
behavior which seemed to be dissonant with one or more of the basic EU axioms. Allais (1953),
Ellsberg (1961), Lichtenstein and Slovic (1971) and Kahneman and Tversky (1979) are some notable
examples. The debate still continues even after so many decades have passed. In rest of this paper, we
will present results from various experimental studies where the authenticity of the EU axioms have
been subjected to the critical testing. Before, we elaborate on these experiments, we discuss the
methodology of this inquiry in the following section.

3. Methodology
In order to account for the EUT axioms’ violations as reported in the empirical literature, a sample of
69 articles has been selected using an adapted version of the approach used by David and Han (2004)
in their assessment of the TCE empirical literature. David and Han identified a representative sample
of studies that empirically tested the core tenets of Williamson’s TCE by using the following
procedure;
1. Search for published journal articles only.
2. Search the ABI/Inform and EconLit databases.
3. Ensure substantive relevance by requiring that selected articles contain at least one primary
keyword in their title or abstract.
4. Eliminate substantively irrelevant articles by requiring that selected articles also contain at least
one of 12 additional keywords in their title or abstract.
5. Ensure empirical content by requiring that selected articles also contain at least one of the
following seven ‘methodological’ keywords in their title or abstract: data, empirical, test,
statistical, finding*, result* or evidence.
119 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

6. Eliminate substantively irrelevant articles by only selecting articles that appear in journals in
which multiple articles appear.
7. Ensure substantive and empirical relevance by reading all remaining abstracts for substantive
context (i.e., discussion of the core tenets of the theory) and empirical content (i.e., mention of
statistical analysis).
8. Further ensure substantive and empirical relevance by reading all remaining articles in their
entirety for substantive context (i.e., article tests the core tenets of the theory) and adequate
empirical content (i.e., article presents results of statistical tests).
9. Consolidate results from ABI/Inform and Econ-Lit and eliminate duplicate articles.
While obtaining the present sample, the above-mentioned procedure has been used with the
following adaptations;
First, this study restricts the search by including articles published in ‘scholarly’/peer-reviewed
journals only (criterion 1). Referring to the work by Light and Pillemer (1984), David and Han (2004)
argued that by restricting their search to journal articles (as opposed to book chapters or unpublished
works, for example), they enhanced quality control. Given this logic, it is felt that by further restricting
the search to the articles published in ‘scholarly’ journals, the quality of the articles returned would be
further ensured for because of the rigorous peer- review process to which these articles are subjected
prior to their publication.
Second, in place of EcoLit, ScienceDirect has been used for its wider adoption in the
contemporary research works.
Third, the substantive keywords used to identify articles via criterion 3 have necessarily been
adapted to make the search relevant to the EU Theory. Whereas David and Han (2004) initially
selected articles that contained either transaction* or cost* in their abstract or title, the present study
initially selects articles that contain either "Decision making", "Decision theory", EU, "Expected
Utility" or "Utility theory" in their abstract or title.
Fourth, David and Han (2004) identified 12 additional keywords that articles must have in their
title or abstract in order to be considered relevant to TCE (criterion 4). In present study, the following
additional keywords have been used to further identify articles that are substantively relevant to the EU
Theory in step 4: "Allais Paradox", Axiom*, Bias*, "Preference reversal", Violat*.
Fifth, the methodological keyword test, has been used together with 2 more key words i.e.
Empirical*, and Experiment*. This was done in order to account for the empirical evidence stemming
from the experimental inquires only.
Sixth, in determining substantive relevance via criteria (7) and (8), articles were retained only if
they revealed some violation of certain axioms of EU theory in their abstracts. The search process
mentioned in above was still augmented with snow ball method which resulted in finding (even though
a small number) useful articles not listed in any of the two databases. Full texts of the articles selected
after the aforementioned filtration process were studied in order to find the relevant facts of matter
which are being reported in the next section.

4. Results and Discussion

4.1. Sample Profile
Following the process outlined in the previous section, we selected 69 articles. As Table 1 shows
majority of these articles pertain to what Muller terms as the “Behavioural Economics Era”.
(www.muellerscience.com). It may also be interesting to note that majority of the authors opted for
Journal of Risk and Uncertainty and Management Science for publishing their results.
120 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)
Table 1: Frequency Distribution of the Research Papers

Decade-wise
Era F %
1950s 01 01.44
1960s 01 01.44
1970s 10 14.49
1980s 17 24.63
1990s 28 40.58
2000s 12 17.39
w.r.t. Muller’s Classification
Era Description F %
1954-1969 The rise of rational decision theory & operations Research 02 02.89
1970-1989 Studies of Biases & Heuristics 27 39.13
1990-date Behavioural Economics 40 57.97
w.r.t. The Scholarly Journals
Rank Journals F %
1 Journal of Risk and Uncertainty 7 10.14
1 Management Science 7 10.14
2 Organizational Behaviour and Human Decision Processes 5 07.24
2 American Economic Review 5 07.24
2 Economic Journal 5 07.24
3 Journal of Experimental Psychology 4 05.79
4 Econometrica 3 04.34
4 Journal of Economic Behaviour & Organization 3 04.34
4 Journal of Mathematical Psychology 3 04.34
4 Journal of Risk Insurance 3 04.34
4 Economic Letters 3 04.34
4 Psychology Review 3 04.34
5 Others 18 26.08

4.2. Axioms’ Violations and the Bias Phenomena

We accounted for the violations of five axioms of EUT: Independence, Betweenness, Transitivity,
Monotonicity, and Reduction. Table 2 presents a summary of our findings concerning such violations
as highlighted by the empirical evidence reported in scholarly journals.
121 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)
Table 2: EUT Axioms’ Violations & the Bias Phenomenon

Axiom Violated Key Contributors Behavioural Biases

Independence Allais (1953), Bleichrodt et al., (2001),, Bleichrodt and Pinto Common-consequence effect
(Including (2000), Burke et. al. (1996), Carlin (1990), Cohen and Jaffray Common-ratios effect
consistency) (1988), Conlisk (1989), Cubitt et. al., (1998), Fan (2002), Reference-point effect
Finkelshtain and Feinerman (1997), Grether and Plott (1979),
Response-mode bias
Harrison (1994), Hershey and Schoemaker (1980, 1985),
Probability-weighting bias
Kahneman and Tversky (1974, 1979, 1981, 1986, 1992),
Loss-aversion
Lichtenstein and Slovic (1971), Lindman (1971), Laughhunn et
al. (1981), Macdonald and Wall (1989), McCord and de Neufville Framing Effect
(1986), Oliver (2002, 2003), Payne et al. (1980, 81), Reilly Anchoring and adjustment
(1982), Schoemaker, (2000), Schoemaker and Kunreuther (1979), Context effects
Slovic et al. (1977), Thaler et al (1997), Tversky et. al. (1990), Preference reversal
Wu and Gonzalez (1996).
Betweenness (A Battalio et al. (1990), Bernasconi (1994), Blavatskyy (2005, Fanning-out/in effect
weaker form of 2007), Camerer (1989), Camerer and Ho (1994), Chew and Context effect
Independence) Waller (1986), Conlisk (1987), Coombs and Huang (1976), Evans Boundary effect
et. al., (1991), Gigliotti and Sopher (1993, 2004), MacDonald et. Ordering effect
al. (1991), Prelec (1990) Framing effect
Transitivity Birnbaum et. al. (1999), Birnbaun and Gutierrez (2007), Event-splitting bias
Birnbaum and Schmidt (2008), Bradbury and Nelson (1974), Regret aversion
Humphrey, (2001), Loomes and Taylor (1992), Loomes et. al. Ordering effect
(1989, 1991), Mellers and Biagini (1994), Shafir (1994), Starmer Dimension interaction
and Sugden, (1998), Tversky, (1969) Framing effect
Monotonicity Birnbaum, (1992), Birnbaum and Sutton (1992), Birnbaum and Probability-weighting bias
Thompson (1996), Birnbaum et. al. (1992), Mellers et. al. (1992,
Ordering effect
1995), Weber et. al. (1992)
Reduction Bar-Hillel (1973), Bernasconi (1994), Birnbaum (2004, 2007), Splitting/coalescing effect.
Carlin (1992), Friedman (2005),Kahneman and Tversky (1979), Anchoring and Adjustment
Segal (1988), Certainty effect
Background Conditionals for Axiomatic Violations
Independence Size (low vs. high) and the nature (hypothetical vs. real) of monetary outcomes, limited ability to
process information, probability transformations/distortions, structure of experiment, aspiration
levels, (high/low) anchors, probability thresholds, limited sensitivity to low probability events,
frequency of outcome evaluations by the decision makers, procedure and description invariance,
nonlinear evaluation of probabilities, greater sensitivity to losses than to gains, over /under-
weighting certain dimensions or specific information, use of heuristics for simplification
Betweenness Nonlinearities in the indifference curves, random errors, lottery’s location in probability triangle,
folded ordering, quasi-concavity and quasi-convexity of preferences
Transitivity Contrast effect of comparison within dimension, Novelty, strength and direction of preference,, use
of a comparative rather than absolute approach in evaluation, similarity among attributes
Monotonicity Distribution of cash value offered for comparison in gambles, probabilities of loss or zero outcome,
decision makers’ view points, judgements about the attractiveness of gains/losses
Reduction Overestimation of the expected value of compound lotteries in comparison to their reduced forms,
coalescing/splitting of branches, higher probability of winning in earlier stages, difference in CEs
for the compound and the reduced lotteries

4.2.1. Independence Axiom

The independence axiom holds that the preference function must be represented as an expectation with
respect to the given distribution of a fixed utility function defined over the set of possible outcomes
(i.e. ultimate wealth levels). In other words, the preference function is constrained to be a linear
function over the set of distribution functions, or, as commonly phrased, "linear in the probabilities”
(Machina, 1982). Therefore a decision maker’s preference over two lotteries should be independent of
any combination with an inclusion of a third lottery. According to Starmer (2000), the independence
axiom places strong restrictions on the form of preferences and gives the standard EU theory most of
its empirical content. Therefore we can say without losing generality that the independence axiom is
122 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

the most crucial in the set of all EUT axioms and as it will turn out in the paragraphs below that most
of the systematic deviations from the predicted outcomes stem from the violations of this axiom.

4.2.1.1. Allais Paradox/Common Consequence effect

Common-consequences effect is the generalization of Allais Paradox which reveals that EUT violations
by the decision maker result from decision reversals. In the experiments manifesting this phenomenon,
the decision maker chooses between a certain outcomes for sure and a lottery in first stage of the
decision problem. Then, he is asked to make a decision between two risky outcomes. The outcomes
clearly violate EUT and show a systematic bias. It was first empirically discovered by Allais (1953)
and later generalized by Tversky and Kahneman (1979, 1981) in their historical works in behavioral
economics.
After the initial findings of Allais, many researchers followed up with studies in which new
experimental designs were employed to; 1) replicate these findings; 2) reveal relevant properties of the
EUT axioms’ violation. Burke et al. (1996) and Harrison (1994) tested if violations of EUT in an Allais
paradox environment are sensitive to monetary incentives. They found that the violations were
significantly reduced when the lotteries were real rather than hypothetical. Fan (2002) found that
imposing hypothetical or real cash rewards induce a change in the structure of Allais Paradox
(resulting in the near disappearance of the paradox) when rewards of the lotteries were small compared
to the original setting of the Allais experimental design. In a different design involving non-monetary
outcomes, Oliver (2002b) found that majority of the experimental subject(s) demonstrated strict and
systematic violations of independence axiom, with many in the direction predicted by Allais. However,
after an experimental inquiry in the loss domain, Macdonald and Wall (1989) attributed the
inconsistencies in their experimental data to the violations of independence axiom and found that such
violations were insensitive to the level of monetary incentives involved.
Despite the vast confirmatory literature, there is still some evidence which falsifies the
truthfulness of independence axiom’s violation in Allais Paradox. An intriguing experimental design
had been dissipated by Carlin (1990) where he reframed lotteries without a reference to decimals or
fractions. Doing that resulted in a (statistically) significant reduction in violations of the independence
axiom. His study had primarily intended to test robustness of the Allais paradox by changing the frame
of lotteries in a seemingly trivial fashion. Reframing also proved to be prolific in reducing such
violations in an experimental study by Conlisk (1989), who examined three variants of the Allais
example. Some evidence in the literature also suggests that the apparent EUT violations in experiments
might be due to the factors other than these axiomatic violations. One such demonstration came from
Finkelshtain and Feinerman (1997) who concluded that violations of EUT under the Allais Paradox
were mainly due to certain choice errors (e.g. misinterpretations of the questions, bad instructions of
the questioners etc.) rather than systematic violations of the EUT axioms. Similar findings have also
been documented by Blavatskyy (2005).

4.2.1.2. Common ratio Effect

The common ratio effect is very akin to the common consequence and/or the Allais paradox. Decision
makers tend to switch their choices from one prospect to the other when the probability is lowered
proportionally across the lotteries, which is inconsistent with EUT. In their study Cubitt et al., (1998)
focused on the common ratio effect in the context of dynamic choice experiments using real financial
incentives. Their findings, however, are inconsistent with several existing theories which purport to
explain the common ratio effect and instead propound a new effect/principle called timing
independence.
123 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

4.2.1.3. Preference Reversal

The preference reversal effect corresponds to the empirical findings that people tend to change their
actual decision when confronted with different contexts. For example, in winning a small prize with
high probability vs. a high prize with small probability, people tend to choose the small prize with high
probability. But when asked for buying the lottery for a certain monetary amount they reverse their
decision and choose the high prize with small probability.
The first studies on the preference reversal effect were published by Lichtenstein and Slovic
(1971) and Lindman (1971). Lichtenstein and Slovic (1971) conducted three experiments in which
undergraduate males chose their preferred bet from pairs of bets and later bid for each bet separately.
In each pair, one bet had a higher probability of winning (p bet); the other offered more to win ($ bet).
Bidding method (selling vs. buying) and payoff method (real-play vs. hourly wage) were varied.
Results showed that when the p-bet was chosen, the $- bet often received a higher bid leading to the
preference reversal phenomenon. A similar study was conducted by Lindman (1971) who performed
five decision-making experiments and found that subjects, in choosing among gambles, tended to
prefer gambles with high probabilities of winning. The same subjects, while naming selling prices,
preferred gambles with small probabilities of winning larger amounts. In two follow-up studies by
Payne et al. (1980), three different experiments were conducted by varying the relationship of pairs of
gambles to an assumed reference point by adding or subtracting a constant amount from all outcomes.
Such translations of outcomes resulted in the reversal of choice within pairs of gambles. Later on,
Payne et al. (1981) extended their previous work by analyzing risky choice behavior in two different
experiments. The results showed convincing evidence for the validity of their earlier explanation.
The culmination of several competing explanations of the preference reversal effect led Grether
and Plott (1979) to an exposition on various experiments on the preference reversal effect up to 1979
and to propose additional (alternative) explanatory frameworks. The main aim of their study, however,
has been to incorporate and/or control for the theoretical causations in their experimental design and
see if the preference reversal phenomenon existed in situations where economic theory is generally
applied, which was eventually shown to be affirmative. Owing to the sensitivity of preference reversal
effect to the experimental setting, Reilly (1982) incorporated some alterations in Grether and Plott's
(1979) previous experiments and found the level of preference reversals to be a function of the
particular experiment's structuring.

4.2.1.4. Procedure and Description Invariance

After the initial unsuccessful quest for a satisfactory explanation of the preference reversal effect, the
scientific community turned to a different approach mainly driven by results supporting the sensitivity
of this phenomenon to the experimental designs/conditions. They found the preference reversals to be a
consequence of the procedure invariance (elicitation effects) and/or the description invariance
(framing effects) instead of any violation of the independence axiom within the EUT framework.
In their experimental study employing different utility elicitation methods, Hershey and
Schoemaker (1985) found that the probability equivalent methods and certainty equivalent method
(although theoretically assumed to be equal) yield inconsistent results. They concluded that the main
reason of this divergence lies within the different decision framing of the subjects. Instead of a
certainty equivalent method, McCord and de Neufville (1986) used a lottery equivalent method to elicit
the preferences in their experiments by eliminating certain amounts in the lottery. Their simplified
method, however, reduced context dependencies as well dependency of the utility function on the
probability involved. A similar finding has been reported by Cohen and Jaffray (1988) who developed
a multiplicative form of the utility function and tested if the certainty effect or the probability
distortions cause violations of EUT. They concluded the former to be most relevant in explaining the
inconsistencies whereas discarded the later on a (poor) evidential-base.
The emergence of evidence for the procedure and description invariance finds its climax in the
classical paper of Tversky et al. (1990) who reveal that preference reversals cannot be adequately
explained by violations of the independence, reduction, or transitivity axiom and propound that the
124 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

main cause of preference reversal is the procedure invariance. In their concluding remarks they
describe the complex and rigid predicament of contemporary decision theorists by stating:
“the failures of description invariance (framing effects) and procedure invariance
(elicitation effects) pose a greater problem for rational choice models than the failure of
specific axioms, such as independence or transitivity, and they demand descriptive
models of much greater complexity; …it does not seem possible to construct a theory of
choice that is both normatively acceptable and descriptively adequate.” (p.215).

4.2.1.5. Response Mode Bias

The concept of response-mode bias is very akin to the procedure invariance. As a variation of
independence, consistency is defined as the property that the preference order should be independent of
the method used to elicit it. Preference reversals between different methods violate the consistency
principle. Hershey and Schoemaker (1985) found in their experiments that PE (probability equivalent)
elicitations lead to systematically different utilities than CE (Certainty equivalent) elicitations. In the
health domain, several authors have shown that different procedures to elicit utilities lead to
systematically different results (Bleichrodt et al., 2001; Oliver, 2003a). Bleichrodt et al. (2001)
controlled for these biases and proposed new corrected formulas based on prospect theory to evaluate
answers to PE and CE measurements and showed that these new formulas were able to resolve the
systematic discrepancy between PE and CE utilities. They argued that decision makers’ preferences are
affected by probability weighting and loss aversion. These biases are quite explicitly modeled by
Prospect theory (Kahneman and Tversky, 1979) and Cumulative Prospect theory (Tversky and
Kahneman, 1992), some of the main contenders for a complete descriptive theory of decision under
risk.

4.2.1.6. Probability Weighting Bias

The probability weighting bias reveals that people tend to behave nonlinear in probabilities. Empirical
studies have shown that the most common pattern for the probability weighting function is inverse S-
shaped; overweighting small probabilities and underweighting large probabilities (Bleichrodt and
Pinto, 2000; Gonzalez and Wu, 1999; Tversky and Fox, 1995; Tversky and Kahneman, 1992).
Macdonald and Wall (1989) attributed consistency violations in their experimental findings to the
nonlinearities in the probabilities, problem representation, context effects and the related expected
utility violating effects. Kahneman and Tversky (1992) incorporated the previous findings on the
inverse s-shaped probability weighting function along with the tenets of rank dependent utility into a
new theory called cumulative prospect theory (CPT) which provides an even better description of
choice under risk and uncertainty compared to the one given by prospect theory.

4.2.1.7. Loss aversion

Loss aversion refers to the tendency in people to strongly prefer avoiding losses than acquiring gains.
A number of experimental studies have questioned this pervasive assumption. In their study Slovic et
al., (1977) observed that people refuse to protect themselves against losses whose probability is below
some threshold. They postulate a utility function that is convex over losses which clearly contradicts
the EUT postulations. In reference to the findings of Slovic et al. (1977), Schoemaker and Kunreuther
(1979) conducted further experiments on insurance and demonstrated that the main reason for utility
violations was people's limited abilities to process information. Hershey and Schoemaker (1980) in
their experiments found that less than 40 percent of their subjects would pay $100 to protect against a
0.01 chance of losing $10,000 (a fair insurance). They found that when low probability and very high
loss lotteries are examined, discrepancies were quite apparent in risk taking attitudes. Finally, empirical
studies on managers’ and investors’ choice behavior show that business managers are risk-seeking
when presented with gambles having outcomes below target return levels and that for investors loss
aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate
outcomes frequently (Laughhunn et al., 1980; Thaler et al., 1997).
125 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

4.2.1.8. Framing Effect

Kahneman and Tversky (1981, 1986) were the pioneers in theorizing this concept according to which
the decision makers systematically violate EU hypotheses due to the different psychological framing of
the contexts. People choose different reference points when asked different questions. They tend to
focus on the probability when directly asked to choose one of the lotteries. When asked for paying,
they tend to focus on the monetary outcome. Thus if the same problem is presented in a different
manner, the choice of people may not be the same. In their empirical study Schoemaker and
Kunreuther (1979) discovered substantial influence of contextual effects on decision making. They
demonstrated that the main reason for EUT violations is people's limited abilities to process
information. A number of related experimental studies like Hershey and Schoemaker (1985) and
Schoemaker and Russo (2001) attributed EU violations to the decision framing and quite convincingly
revealed that choice and valuation tasks invoke different mental processes which in turn generate
different orderings of the given pair(s) of prospects.

4.2.1.9. Reference point effect

Decision makers base their evaluation of alternatives on certain reference point(s). They assess
departures from this reference point as gains or losses. The gains and losses relative to a reference
point have been referred as the “reference point effect” by Kahneman and Tversky (1979, 1981).
Although EU hypothesis suggests that alternatives should be evaluated with respect to their effects on
final wealth levels, it is (cognitively) easier for the decision makers to assess options in terms of gains
and/or losses relative to some reference point (Schoemaker, 2000). They use certain heuristics as the
simplifying method for optimal decision making. That is why Grether and Plott’s (1979) view of the
decision maker is: “the one who is continually searching for systematic procedures that will produce
quick and reasonably satisfactory decisions”. Finally, Payne et al. (1980) reveal that reference point
effects (e.g. target return) are variations on the concept of the aspiration level.

4.2.1.10. Anchoring and Adjustment

Lichtenstein and Slovic (1971) and Tversky and Kahneman (1974) were the first to highlight this
concept according to which individuals normally over weight certain dimensions or specific
information during the decision making process. They normally start with an “anchor” (a reference
point) and then make adjustments to reach the final decision. Bleichrodt (2001) has revealed
‘anchoring and insufficient adjustment’ to be a convincing explanation for the observed violations of
EU hypothesis.

4.2.3. Betweenness Axiom

The betweenness (a weaker form of independence) axiom holds that a lottery offering outcomes A and
B have an attractiveness level intermediate to those of A and B. The pioneering empirical work on this
axiom was published by Coombs and Huang (1976) who reported two experiments on portfolio theory
where significant violations of the betweenness condition were observed. Similar results were reported
by Chew and Waller (1986) and Battalio et al. (1990) who found that around 30% of their
experimental subjects systematically violated the betweenness axiom. In a subsequent study, Camerer
(1989) reported empirical evidence on the fanning out and fanning in of indifference curves and the
quasiconcavity and quasiconvexity of preferences, indicating that the subjects in their experiments
systematically violated the betweenness axiom in a non-random fashion. Gigliotti and Sopher (1993)
attributed the violations of betweenness axiom to the nonlinearities in the indifference curves.
Interestingly, empirical experiments on the betweennes axiom are not restricted to the human choice
domain only. MacDonald et. al. (1991) conducted an experiment with rats and found systematic
violations of the betweenness axiom ultimately implying that indifference curves are convex rather
than linear in the probabilities.
126 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

In a recapitulatory empirical paper Camerer and Ho (1994), however, assert that the violations
of betweenness axiom are not as frequent as the violations of independence. In their summary on
different empirical studies on the violations of betweenness they depict that Coombs and Huang
(1976), Chew and Waller (1986), Conlisk (1987), Camerer (1989), Prelec (1990), Gigliotti and Sopher
(1993), Battalio et al. (1990), and Bernasconi (1994) all found significant violations of this axiom in
their experimental ventures. Their concluding remarks on the causes of such violations point the
attention to non-linearity in probabilities and framing effects, ultimately showing a limited descriptive
value of EU hypothesis under risky choices. Similar results on the context dependency of such
violations have been reported by Evans et al., (1991) in their financial-choice experiments. However,
after his reexamination of several experimental studies Blavatskyy (2006, 2007) postulates (by
introducing a stochastic version of the EUT) that violations of the betweenness can be the result of
random errors in choice under risk.

4.2.4. Transitivity Axiom

Transitivity is defined as: If A is preferred to B, and B is preferred to C, then A must be preferred to C.
Transitivity therefore holds that all “indirect" links which can be established via some third element,
are also explicitly contained in that relation. A number of experimental studies (e.g. Birnbaum et. al.,
1999; Bradbury and Nelson (1974; Humphrey, 2001; Loomes et. al., 1989, 1991; Loomes and Taylor,
1992; Starmer and Sugden, 1998; Tversky, 1969) have reported violations of the transitivity axiom.
Referring to a similar study by Smedslund in 60s, Bradbury and Nelson (1974) (in a non-
economic context) found that children and adults frequently showed non-random intransitive responses
and thus violated transitivity systematically. They ascribed the inconsistencies in child preferences to
the psychological concept of novelty and provided further evidence that the violations declined with
age but remained systematic. Looms et al., (1989) observed the preference reversal phenomenon in an
experimental design in which individuals made straight choices rather than being required to report
reservation prices. In each case, majority of the transitivity violations were in the direction
corresponding with the classic preference reversal phenomenon indicating that the explanation of the
preference reversal by violations of transitivity looms larger than by information processing effects
alone. After their initial findings Looms et al., (1991) extended their experimental work through a
design that was insensitive to the violations created by different value elicitation methods, incentive
systems and diverging outcomes between valuation and choice tasks. These factors were all believed to
create the preference reversal effect, as revealed in the previous literature. However, the results showed
that none of these factors including random errors were valid explanations of the preference reversals
in their experiments with the exception of regret theory thus concluding that the descriptive validity of
the transitivity axiom is questionable. Later on, Starmer and Sugden (1998) designed four experiments
to replicate the findings from Loomes et al. (1989, 1991). The results showed that the main reasons for
transitivity violations lie in the realm of decision making heuristics and framing effects. In a subsequent
empirical study, Humphrey (2001) developed a new experimental design by controlling and testing for
the relative contributions of event-splitting effects and framing effects. He successfully replicated
previous findings on systematic transitivity violations consistent with regret theory, but found that
(contrary to the existing literature) event splitting effects had a limited explanatory power for
transitivity violations. Similar to the findings of Starmer and Sugden (1998), he propounded decision
making heuristics and framing effects as the main reasons for inconsistent behavior.
Most of the experimental designs testing transitivity up to the beginning of 1990s were mainly
concerned with decisions that only involved gains. One of the first studies that analyzed the loss
domain is that of Loomes and Taylor (1992) who after conducting a series of experiments revealed that
transitivity is not a robust and indispensable principle of choice in the domain of losses. They observed
significant asymmetries in the patterns of nontransitive cycles all of which were in the direction
predicted by regret theory. They concluded that regret aversion is capable of predicting a broad range
of systematic violations of transitivity.
127 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

One of the problems in studying transitivity violations is about deciding whether these are
“true/systematic” violations or just “random errors/unsystematic” violations. Scholars have
distinguished between systematic violations of transitivity from momentary fluctuations of judgment
and have extended the deterministic structure of the common transitivity axiom into the probabilistic
domain by forming the concept of weak stochastic transitivity. Weak stochastic transitivity is defined
as: if P(A,B) ≥ 1/2 and P(B,C) ≥ 1/2 then P(A,C) ≥ 1/2, where P(A,B) is the probability of choosing A
over B (see Birnbaum et al., 1999). One of the earlier proponents of this concept Tversky (1969)
reported systematic and predictable violations of weak stochastic transitivity in two separate
experiments, one dealing with gambles and the other with college applicant decisions. In their
empirical work on evidence against rank dependent utility theories Birnbaum et al. (1999) tested if any
connection between stochastic dominance and transitivity exists and found that violations of stochastic
dominance can produce but are not explained by violations of transitivity. Strong stochastic transitivity
is defined in accordance to weak stochastic transitivity (P(A,B) ≥ 1/2 and P(B,C) ≥ 1/2 then
P(A,C) ≥ 1/2) as the consequence that P(A,C) should exceed the larger of P(A,B) and P(B,C).
The research on the transitivity of preferences is not restricted to the human behavior alone.
Shafir (1994) tested a proximate-level hypothesis about decision making in honey bees showing that
three out of fifteen bees violated weak and strong stochastic transitivity in making decisions between
different flowers. They propounded that the bees use a comparative rather than absolute approach in
evaluation, which explains these intransitivities. Two recent studies on transitivity, however, show
mitigating results. Birnbaum and Gutierrez (2007) conducted two new experiments in which hundreds
of participants made choices among the same gambles as studied by Tversky (1969) and concluded
that very few people repeated intransitive patterns. Similarly, Birnbaum and Schmidt (2008) found no
evidence for systematic intransitivities in a recent study. They concluded that the absence of violations
is consistent with theories that assume transitivity.

4.2.5. Monotonicity Axiom

There are two types of monotonicity i.e. 1) outcomes, and 2) probabilities. The first holds: If two
alternatives are otherwise identical, but one gamble has one outcome that is preferred to the
corresponding outcome of the other gamble, then the gamble with the better outcome should be
preferred. Similarly, if two gambles are identical, except one has a greater probability of a preferred
outcome and lower probabilities of less preferred outcomes, the one with the higher probability of the
better outcome should be preferred. The concept of stochastic dominance combines these two types of
monotonicity. The dominance principle states that one should prefer the option with consequences that
are at least as good as those of other options for any state of the world.
Although outcome monotonicity seems a very reasonable axiom for the rational decision
maker, a number of experiments have found situations in which human judgments appeared to violate
this principle systematically (Birnbaum, 1992; Birnbaum et. al., 1992; Birnbaum and Sutton, 1992;
Mellers et. al., 1992). In the experiments conducted by Birnbaum et al., (1992), subjects judged the
values of lotteries from three points of view: the highest price a buyer should pay, the lowest price a
seller should accept, and the “fair" price. Data showed violations of branch independence and
monotonicity (dominance). The rank order of judgments changed as a function of decision makers’
point of view. Birnbaum (1992) found that violations of monotonicity persisted even when gambles are
ordered by choice based certainty equivalents (based on comparisons between gambles and sure
amounts of money). He also found that the inferred certainty equivalent (the value of cash that it is
preferred half the time to the gamble) depends on the distribution of cash values offered for
comparison against the gambles, which further ads to the difficulty of comparing certainty equivalents
when the set of comparison values for the gambles being compared is different. Later, Birnbaum and
Thompson (1996) found violations of monotonicity with choices between gambles and a fixed set of
amounts of money that would be received for certain. In their experiments, a set of relations had been
defined on choice proportions as: $A\succ _{c} B$ (Gamble A is preferred to B on relation c) if and
only if the proportion of choices favouring amount c over Gamble A is less than the proportion
128 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

choosing c over B. Results revealed systematic violations of monotonicity when c is greater than the
minimum outcome of the superior gamble, but not when c is less than this value.
Configural-weight theory explains the effect of viewpoint, the violations of branch
independence, and the violations of monotonicity using a single scale of utility that is independent of
the lottery and the point of view. Monotonicity violations occur because the worst outcome of zero has
a much lower weight than a worst outcome that is a small positive amount (for the same low
probability). Birnbaum and Sutton (1992) revealed systematic violations of dominance that can be
explained by assuming that the configural weight of zero (when it is the lower value) has smaller
weight at low probabilities than nonzero outcomes. Weber et al., (1992) observed that people judged
both the attractiveness and risk of lotteries to win or lose money. They found that risk judgments were
more sensitive to the probability of losses and zero outcomes compared to attractiveness judgments,
which were more sensitive to the probability of gains. Mellers et al., (1995) refuted the view that
configural weighting is caused by a shift in strategy that would apply only to two-outcome gambles.
They observed that people violate the dominance principle even with three-outcome gambles with
financial incentives.

4.2.6. Reduction Axiom

The Reduction of Compound Lotteries axiom holds that a decision maker should be indifferent between
two lotteries with the same probability of winning and the same prize for winning. However, empirical
results have not always supported this (e.g. Bar-Hillel, 1973; Kahneman and Tversky, 1979; Friedman,
2005 etc.). The violations of this axiom are often found in studies where subjects are required to
choose between lotteries (e.g. Kahneman and Tversky 1979, Bernasconi 1994). These studies have
shown that decision makers tend to overestimate the expected value of compound lotteries compared to
their reduced forms. The violation is more frequent and intense in compound lotteries with a higher
probability of winning occurring in the earlier stages.
In her experiment, Bar-Hillel (1973) found that people tend to overestimate the probability of
conjunctive events and underestimate the probability of disjunctive events. These biases can be
explained as the effects of anchoring: i.e., the stated probability of the elementary event provides a
natural starting point from which insufficient adjustment is made to arrive at the final answer. Segal
(1988) revealed that the preference reversal phenomenon can be traced back to violations of the
reduction axiom. He suggested a decision mechanism for the preference reversals lotteries which is
transitive and satisfies the independence axiom, but not the reduction axiom. Friedman (2005) during
his experiment observed that subjects systematically preferred compound lotteries to their reduced
forms. He found a (statistically) significant difference between the certainty equivalents (CEs) derived
for compound lotteries, and those derived for their reduced forms, with the CEs for the compound form
being higher.
Carlin (1992) reveals that violations of expected utility theory associated with the Allais
paradox and common ratio effect are sensitive to the reduction process. In his inquiry, Birnbaum
(2004) also concluded coalescing (reduction) to be the main factor behind the EUT violations by
stating: “the exception in this study is that a variable has been identified that not only undoes the Allais
paradox, it significantly reverses it. That variable is the splitting or coalescing of branches, which
appears to give the best explanation of common consequence paradoxes.” (p.105). Later on, Birnbaum
(2007) finds further evidence that coalescing (reduction) is crucial for the EUT inconsistencies. He
refutes cumulative prospect theory (CPT) as an appropriate explanatory framework for “Allais
paradoxes”.

5. Conclusion
In this paper, we have taken an account of the violations of EUT axioms reported in scholarly journals.
We selected our sample of research papers (reporting such violations) using an adapted version of
David and Han procedure used by them in order to identify a representative sample of studies that
129 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

empirically tested the core tenets of Williamson’s Transaction Cost Economics (TCE). A total of 69
articles have been included in the investigation majority of which have been published during the
“Behavioural Economics Era (1990 to date) in the Journal of Risk and Uncertainty, and Management
Science.
Majority of the experimental studies have reported a violation of the independence axiom
which has been attributed to a host of behavioural biases like common-consequences effect, common
ratio effect, preference reversals, framing effects, reference point effects, anchoring and adjustment
bias, probability-weighting bias, response-mode bias and the loss-aversion. The background
conditionals for such violations include size (low vs. high) and the nature (hypothetical vs. real) of
monetary outcomes, decision makers’ limited ability to process information, probability
transformations/distortions, structure of experiment, aspiration levels, (high/low) anchors, probability
thresholds, limited sensitivity to low probability events, frequency of outcome evaluations by the
decision makers, procedure and description invariance, nonlinear evaluation of probabilities, greater
sensitivity to losses than gains, over/under weighting certain dimensions or specific information, and
the use of heuristics for simplification.
Betweenness (a weaker form of independence) is the second most violated axiom. These
violations have been attributed to the fanning-out/in effects, context effects, boundary effects, ordering
effects, and the framing effect. The notable factors behind these violations include the lottery’s location
in probability triangle, nonlinearities in the indifference curves, random errors, quasiconcavity and
quasiconvexity of preferences, and the folded ordering.
Transitivity violations (the third in that order) have been attributed to the event-splitting bias,
regret-aversion, dimension-interaction, ordering effect, and the framing effects. They salient
background conditionals of these violations include contrast effect of comparison within dimension,
novelty, strength and direction of preference, use of a comparative rather than absolute approach in
evaluation, and the similarity among attributes.
The violations of monotonicity axiom have been attributed to the probability weighting bias,
and the ordering effects. The key factors behind these violations include the distribution of cash value
offered for comparison in gambles, probabilities of loss or zero outcome, decision makers’ view points,
and judgements about the attractiveness of gains/losses.
Finally, the violations of reduction axiom have been attributed to the splitting/coalescing
effects, anchoring and adjustment effect, and the certainty effect. Overestimation of the expected value
of compound lotteries in comparison to their reduced forms, coalescing/splitting of branches, higher
probability of winning occurring in earlier stages, and the difference in CEs for the compound and the
reduced forms of lotteries have been revealed as the most important background conditionals.
Despite these widely-reported violations of its axiomatic foundations, we still believe that EUT
is and will continue to act as a crucial reference framework for the emerging explanations of decision
behaviour especially under risk and uncertainty.
130 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

References
1] Allais, M., 1953. “Le comportement de l’homme rationnel devant le risque: critique des
postulats et axiomes de l’école Américaine”. Econometrica, 21, pp. 503-46.
2] Bar-Hillel, M., 1973. “On the subjective probability of compounded events”, Organizational
Behavior and Human Performance, 9, pp. 396-406.
3] Battalio, R., J. Kagel, and K. Jiranyakul, 1990. “Testing between alternative models of choice
under uncertainty: Some initial results”, Journal of Risk and Uncertainty, 3, pp. 25–50.
4] Bernasconi, M., 1994, “Nonlinear preference and two-stage lotteries: theories and evidence”,
Economic Journal, 104, pp. 54–70.
5] Bernoulli, D., 1738, originally published in 1738, translated by Dr. Lousie Sommer (January
1954), “Exposition on a new theory on the measurement of risk”, Econometrica, 22(1), pp.22-
36
6] Birnbaum, M. H., 1992. “Violations of monotonicity and contextual effects in choice-based
certainty equivalents”, Psychological Science, 3, pp. 310-14.
7] Birnbaum, M. H., and S. E. Sutton, 1992. “Scale convergence and utility measurement”,
Organizational Behavior and Human Decision Processes, 52, pp. 183-215.
8] Birnbaum, M. H., G. Coffey, B. A. Mellers, and R. Weiss, 1992. “Utility measurement:
Configural-weight theory and the judge's point of view”, Journal of Experimental Psychology:
Human Perception and Performance, 18, pp. 331-46.
9] Birnbaum, M. and L. Thompson, 1996. “Violations of monotonicity in choices between
gambles and certain cash” The American Journal of Psychology, 109(4), pp. 501-23.
10] Birnbaum, M. H., J. N. Patton, and M. K. Lott, 1999, “Evidence against rank-dependent utility
theories: Violations of cumulative independence, interval independence, stochastic dominance,
and transitivity”, Organizational Behavior and Human Decision Processes, 77, pp. 44-83.
11] Birnbaum, M.H., 2004. “Causes of Allais common consequence paradoxes: An experimental
dissection”, Journal of Mathematical Psychology, 48 (2), pp. 87-106
12] Birnbaum, M.H., 2007. “Tests of branch splitting and branch-splitting independence in Allais
paradoxes with positive and mixed consequences”, Organizational Behavior and Human
Decision Processes, 102 (2), pp. 154-73.
13] Birnbaum, M. and R. Gutierrez, 2007. “Testing for intransitivity of preferences predicted by a
lexicographic semi-order”, Organizational Behavior and Human Decision Processes, 104(1),
pp. 96-112.
14] Birnbaum, M. and U. Schmidt, 2008. “An experimental investigation of violations of
transitivity in choice under uncertainty”, Journal of Risk and Uncertainty, 37, pp. 77–91.
15] Blavatskyy, P. (2005). “Back to the St. Petersburg Paradox?” Management Science, 51 (4),
677-78.
16] Blavatskyy, P., 2006. “Violations of betweenness or random errors?”, Economic Letters, 91(1),
pp. 34-38.
17] Blavatskyy, P., 2007. “Stochastic expected utility theory”, Journal of Risk and Uncertainty,
34(3), pp. 259-87.
18] Bleichrodt, H., and J. L. Pinto, 2000. “A parameter-free elicitation of the probability weighting
function in medical decision analysis”, Management Science, 46, pp. 1485-96.
19] Bleichrodt, H., 2001. “Probability weighting in choice under risk: An empirical test”, Journal
of Risk and Uncertainty, 23, pp. 185-98.
20] Bleichrodt, H. J. L. Pinto, and P. P. Wakker, 2001. “Using descriptive findings of prospect
theory to improve prescriptive applications of expected utility”, Management Science, 47(11),
pp. 1498–1514.
21] Bradbury, H. and T. M. Nelson, 1974. “Transitivity and the patterns of children's preferences”,
Developmental Psychology, 10(1), pp. 55-64.
22] Burke, M. S., J. C. Carter, R. D. Gominiak, and F. D. Ohl, 1996. “An experimental note on the
Allais paradox and monetary incentives”, Empirical Economics, 21, pp. 617–32.
131 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

23] Camerer, C. and T. Ho, 1994. “Violations of the betweenness axiom and nonlinearity in
probability”, Journal of Risk and Uncertainty, 8, pp. 167–96.
24] Camerer, C., 1989. “An experimental test of several generalized utility theories”, Journal of
Risk and Uncertainty, 2, pp. 61–104.
25] Carlin, P. S., 1990. “Is the Allais paradox robust to a seemingly trivial change of frame?”
Economics Letters, 34 (3), pp. 241-44.
26] Carlin, P. S., 1992. “Violations of the reduction and independence axioms in Allais-type and
common-ratio effect Experiments”, Journal of Economic Behavior & Organization, 19 (2), pp.
213-35.
27] Chew, S. and W. Waller, 1986. “Empirical tests of weighted utility theory”, Journal of
Mathematical Psychology, 30, pp. 55–72.
28] Cohen, M., and J. Y. Jaffray, 1988. “Certainty effect versus probability distortion: An
experimental analysis of decision making under risk”, Journal of Experimental Psychology:
Human Perception and Performance, 14(4), pp. 554-60.
29] Conlisk, J., 1989. “Three variants on the Allais example”, American Economic Review, 79, pp.
392–407.
30] Conlisk, J.,1987. "Verifying the betweenness axiom with questionnaire evidence, or not: Take
your pick", Economics Letter, 25, pp. 319-22.
31] Coombs, C. and L. Huang, 1976. “Tests of the betweenness property of expected utility”,
Journal of Mathematical Psychology, 13, pp. 323–37.
32] Cubitt, R. P., C. Starmer, and R. Sugden, 1998. “Dynamic choice and the common ratio effect:
An experimental investigation”, The Economic Journal, 108 (450), pp. 1362-81.
33] David, R. J. and S. K. Han, 2004. “A systematic assessment of the empirical support for
transaction cost economics”, Strategic Management Journal, 25(1), pp. 39–58.
34] Ellsberg, D., 1961. "Risk, ambiguity and the savage axioms," Quarterly Journal of Economics,
75, pp. 643-69.
35] Evans, D. A., M. D. Phillips, and J. H. Holcomb, 1991. “Tests of the Betweenness property in
experimental financial choices”, Journal of Economic Behavior & Organization, 15(2), pp.
279-96.
36] Fan, C. P., 2002. “Allais paradox in the small”, Journal of Economic Behavior & Organization,
49, pp. 411–21.
37] Friedman, Z., 2005. “Testing the reduction of compound lotteries axiom: Violations in decision
theory”, Working Paper, http://ur.wustl.edu/digest/media/unedited_v1_Friedman.pdf, accessed
on 15.11.2007.
38] Gigliotti, G., and B. Sopher, 1993. “A test of generalized expected utility theory”, Theory and
Decision, 35, pp.75–106
39] Gonzalez, R., and G. Wu, 1999. “On the form of the probability weighting function”, Cognitive
Psychology, 38, pp.129-66.
40] Grether, D. M., and C. R. Plott, 1979. "Economic theory of choice and the preference reversal
phenomenon”, American Economic Review, 69, pp.623-38.
41] Harrison, G. W., 1994. “Expected utility and the experimentalists”, Empirical Economics, 19,
pp. 223–53.
42] Hershey J. C., and R. Schoemaker, 1980. "Risk-taking and problem context in the domain of
losses: An expected utility analysis", Journal of Risk Insurance, 47(1), pp. 111-32.
43] Hershey, J. C., and R. Schoemaker, 1985. “Probability versus certainty equivalence methods in
utility measurement: Are they equivalent?”, Management Science, 31, pp.1213-31.
44] Humphrey, S. J., 2001. “Non-transitive choice: Event-splitting effects or framing effects?”,
Economica, 68, pp. 77-96.
45] Kahneman, D., and A. Tversky, 1979. “Prospect Theory: An analysis of decision under risk”,
Econometrica, 47(2), pp. 263-91.
132 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

46] Kahneman, D., and A. Tversky, 1981. “The framing of decisions and the psychology of
choice”, Science, 211, pp. 453-58
47] Lichtenstein, S., and P. Slovic, 1971. “Reversals of preference between bids and choices in
gambling decisions”, Journal of Experimental Psychology, 89(1), pp. 46-55
48] Light, R. J., and D. B. Pillemer, 1984. Summing Up: The Science of Reviewing Research,
Cambridge: Harvard University Press.
49] Lindman, H., 1971. “Inconsistent preferences among gambles”, Journal of Experimental
Psychology, 89(2), pp. 390-97
50] Loomes, G., C. Starmer, and R. Sugden, 1989. “Preference reversal: information-processing
effect or rational non-transitive choice?”, Economic Journal, 99, pp. 140-51.
51] Loomes, G., C. Starmer, and R. Sugden, 1991. “Observing violations of transitivity by
experimental methods”, Econometrica, 59, pp. 425-40.
52] Loomes, G., and C. Taylor, 1992). “Non-transitive preferences over gains and losses”, The
Economic Journal, 102, pp. 357-65.
53] Laughhunn, D. J., and J. W. Payne, 1980. “Managerial risk preferences for below-target
returns, Management Science, 26, pp. 1238 - 49.
54] Machina, 1982. “Expected utility analysis without the independence axiom”, Econometrica, 50,
pp. 277–323.
55] Macdonald, D. N. and J. L. Wall, 1989. “An experimental study of the Allais paradox over
losses: Some preliminary evidence”, Quarterly Journal of Business and Economics, 28, pp. 43–
60.
56] MacDonald, D N., J. H. Kagel,., and R. Batttalio, 1991. "Animals' choices over uncertain
outcomes: Further experimental results," Economic Journal, pp. 101
57] McCord, M., and R. de Neufville, 1986. “Lottery equivalents: Reduction of the certainty effect
problems in utility assessment”, Management Science, 32, pp. 56-60.
58] Mellers, B. A, P. M.Berretty,, and M.H. Birnbaum, 1995. “Dominance violations in judged
prices of two- and three-outcome gambles”, Journal of Behaviora1 Decision Making, 8, pp.
201-16.
59] Mellers, B. A., and K. Biagini, 1994. “Similarity and choice”, Psychological Review, 101, pp.
505-18.
60] Morgenstern, O., and J. von Neumann, 1944. Theory of Games and Economic Behavior.
Princeton: Princeton University Press.
61] Oliver, A. 2003a. “The internal consistency of the standard gamble: Tests after adjusting for
prospect theory”, Journal of Health Economics, 22, pp. 659-74.
62] Oliver, A. 2003b. “A quantitative and qualitative test of the Allais paradox using health
outcomes”, Journal of Economic Psychology, 24, pp. 35–48.
63] Payne, J. W. and D. J. Laughhunn, and R. L. Crum, 1980. “Translation of gambles and
aspiration level effects in risky choice behavior”, Management Science, 26(10), 1039-60.
64] Payne, J. W., Laughhunn, D. J. and Crum, R. L. (1981), “Further tests of aspiration level effects
in risky choice behavior”, Management Science, 27(8), pp. 953-58.
65] Prelec D., 1990. “A ‘pseudo-endowment’ effect, and its implications for some recent
nonexpected utility models”, Journal of Risk and Uncertainty, 3, pp. 247–59.
66] Reilly, R. 1982. “Preference reversal: Further evidence and some suggested modifications in
experimental design”, American Economic Review, 72(3), pp. 576-84.
67] Schoemaker R., and H. Kunreuther, 1979. “An experimental study of insurance decisions”,
Journal of Risk Insurance, 46(4), pp. 603-18.
68] Schoemaker, P. J. H, and J. E. Russo, 2001. “Managing Frames to Make Better Decisions,”
Chapter 8 in S. Hoch and H. Kunreuther (eds), Wharton on Making Decisions, Wiley, April
2001, pp. 131-155.
69] Segal, U., 1988. “Does the preference reversal phenomenon necessarily contradict the
independence axiom”, The American Economic Review, 78(1), pp. 233-36.
 133 European Journal of Economics, Finance and Administrative Sciences - Issue 15 (2009)

70] Shafir, S., 1994. “Intransitivity of preferences in honey bees: support for 'comparative'
evaluation of foraging options”, Animal Behavior, 48(1), pp. 55-67.
71] Slovic P., B. Fischhoff, S. Lichtenstein, B. Corrigan, and B. Coombs, 1977. “Preference for
Insuring against probable small losses: Insurance implications”, Journal of Risk Insurance,
44(2), pp. 237-58.
72] Starmer, C., and R. Sugden, 1998. “Testing alternative explanations of cyclical choices”,
Economica, 65, pp. 347-61.
73] Starmer, C., 2000. “Developments in Non-expected utility theory: The hunt for a descriptive
theory of choice under risk”, Journal of Economic Literature, 38, pp. 332–82.
74] Thaler, R. H., A. Tversky, D. Kahneman, and A. Schwartz, 1997. “The effect of myopia and
loss aversion on risk taking: An experimental test “, The Quarterly Journal of Economics,
112(2), pp. 647-61
75] Tversky, A., 1969. “Intransitivity of preferences”, Psychological Review, 76(1), pp. 31-48.
76] Tversky, A., and D. Kahneman, 1974. “Judgment under uncertainty: Heuristics and biases”.
Science, 185, pp. 1124-30.
77] Tversky A., D. Kahneman, 1986. "Rational choice and the framing of decisions", Journal of
Business, 59(4), pp. 251-87.
78] Tversky, A., P. Slovic, and D. Kahneman, 1990. “The causes of preference reversal,” American
Economic Review, 80, pp. 204-17.
79] Tversky, A., and D. Kahneman, 1992. “Advances in prospect theory: Cumulative
representation of uncertainty”, Journal of Risk and Uncertainty, 5, pp. 297–323.
80] Tversky, A., and C. Fox, 1995. “Weighing risk and uncertainty”, Psychological Review, 102(2),
pp. 269-83
81] Sekran, U., 1984. Research Methods for Business: A Skill Building Approach. John Wiley &
Sons, pp. 20-32
82] www.muellerscience.com, accessed on 23.10.2007.
83] Weber, E. U., C. J. Anderson, and M. H. Birnbaum, 1992. “A theory of perceived risk and
attractiveness”, Organizational Behavior and Human Decision Processes, 52, 492-523.

View publication stats