2010 | 11 | 1 | 223-253
Article title

Buying and selling price for risky lotteries and expected utility theory without consequentialism

Title variants
Languages of publication
"In this paper I show that within expected utility large buying and selling price gap is possible and [R] paradox may be resolved if only initial wealth is allowed to be small. It implies giving up the doctrine of consequentialism which may be reduced to requiring initial wealth to be total lifetime wealth of the decision maker. Still, even when initial wealth is allowed to be small and interpreted narrowly as gambling wealth, classic preference reversal is not possible within expected utility. I show that only another kind of reversal which I call preference reversal B is possible within expected utility. Preference reversal B occurs when buying price for one lottery is higher than for another, but the latter lottery is chosen in a direct choice. I demonstrate that classic preference reversal is susceptible to arbitrage whereas preference reversal B is not which suggests that the latter reversal is more rational."
Physical description
  • Becker G. M., DeGroot M. H., Marschak J. (1964). Measuring utility by a singleresponse sequential method. Behav Sci 9, 226–32.
  • Cox J. C., Sadiraj V. (2006). Small- and large-stakes risk aversion: Implications of concavity calibration for decision theory. Games and Economic Behavior 56, 45–60.
  • Foster D., Hart S. (2007, July). An operational measure of riskiness.
  • Fudenberg D., Levine D. K. (2006). A dual-self model of impulse control. American Economic Review 96, 1449–1476.
  • Grether D. M., Plott C. R. (1979). Economic theory of choice and the preference reversal phenomenon. The American Economic Review 69, 623–638.
  • Hanemann W. M. (1991). Willingness to pay and willingness to accept: How much can they differ? American Economic Review 81, 635–647.
  • Horowitz J. K., McConnell K. E. (2002). A review of WTA/WTP studies. Journal of Environmental Economics and Management 44, 426–447.
  • Kahneman D. , Tversky A. (1979). Prospect theory: An analysis of decision under risk. Econometrica 47, 263–292.
  • Knetsch J. L. , Sinden J. A. (1984). Willingness to pay and compensation demanded: Experimental evidence of an unexpected disparity in measures of value. The Quarterly Journal of Economics 99, 507–521.
  • Lewandowski M. (2009, June). Risk attitudes, buying and selling price for a lottery and simple strategies, unpublished manuscript.
  • Palacios-Huerta I., Serrano R. (2006). Rejecting small gambles under expected utility. Economics Letters 91, 250–259.
  • Rabin M. (2000). Risk aversion and expected-utility theory: A calibration theorem. Econometrica 68 (5), 1281–1292.
  • Raiffa H. (1968). Decision Analysis: Introductory Lectures on Choices Under Uncertainty. Addison-Wesley.
  • Rubinstein A. (2002). Comments on the risk and time preferences in economics. Tel Aviv University Working Paper.
  • Rubinstein A. (2009). Lecture Notes in Microeconomic Theory: The Economic Agent. Princeton University Press.
  • Safra Z., Segal U. (2008). Calibration results for non-expected utility theories. Econometrica 76, 1143–1166.
  • Schmidt, U., Starmer C., Sugden R. (2008). Third-generation prospect theory. Journal of Risk and Uncertainty 36, 203–223.
  • Thaler R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization 1 (1), 39–60.
  • von Neumann J., Morgenstern O. (1944). Theory of games and economic behavior. Princeton University Press.
Document Type
Publication order reference
YADDA identifier
JavaScript is turned off in your web browser. Turn it on to take full advantage of this site, then refresh the page.