Han Bleichrodt

• Erasmus University Rotterdam

This paper introduces source theory, a new theory for decision under ambiguity (unknown probabilities). It shows how Savage’s subjective probabilities, with source-dependent nonlinear weighting functions, can model Ellsberg’s ambiguity. It can do so in Savage’s framework of state-contingent assets, permits nonexpected utility for risk, and avoids m...

Overconfident behavior, the excessive willingness to bet on one’s performance, may be driven by optimistic beliefs and/or ambiguity attitudes. Separating these factors is key for understanding and correcting overconfident behavior, as they call for different corrective actions. We present a method to do so, which we implement in two incentivized ex...

Several papers have challenged the robustness of loss aversion, claiming that it is context-dependent and disappears for small stakes. These papers use a behavioral definition of loss aversion that may be confounded by diminishing sensitivity and probability/event weighting under the new version of prospect theory (PT). We perform a new theory-base...

Gul and Pesendorfer (2015) propose a promising theory of decision under uncertainty, they dub Hurwicz expected utility (HEU). HEU is a special case of α ‐maxmin EU that allows for preferences over sources of uncertainty. It is consistent with most of the available empirical evidence on decision under risk and uncertainty. We show that HEU is also t...

Surveys typically use hypothetical questions to measure subjective and unverifiable concepts like happiness and quality of life. We test whether this is problematic using a large survey experiment on health and subjective well-being. We use Prelec’s Bayesian truth serum to incentivize the experiment and defaults to introduce biases in responses. Wi...

Promoting prevention is an important goal of public policy. Fifty years ago, Ehrlich and Becker (J Polit Econ 80:623-648, 1972) proposed a simple model of prevention (or self-protection as they called it). Surprisingly enough, subsequent research, mainly within the expected utility paradigm, showed that it is hard to derive clear predictions within...

This paper introduces the index [Formula: see text] as a measure of time inconsistency and vulnerability to self-control problems in the quasi-hyperbolic, beta-delta ([Formula: see text] discounting model. We provide a preference foundation for [Formula: see text] and, consequently, a revealed preference definition of failed self-control. The [Form...

An important societal problem is that people underinsure against risks that are unlikely or occur in the far future, such as natural disasters and long-term care needs. One explanation is that uncertainty about the risk of non-reimbursement induces ambiguity averse and risk prudent decision makers to take out less insurance. We set up an insurance...

Research on quality adjusted life year (QALY) has been underway for just over 50 years, which seems like a suitable milestone to review its history. The purpose of this study is to provide a historical overview of why the QALY was developed, the key theoretical work undertaken by Torrance, Bush and Fanshel and how two seminal papers shaped its subs...

We introduce belief hedges, i.e., sets of events whose uncertain subjective beliefs neutralize each other. Belief hedges allow us to measure ambiguity attitudes without knowing those subjective beliefs. They lead to improved ambiguity indexes that are valid under all popular ambiguity theories. Our indexes can be applied to real-world problems and...

This paper introduces the Prince incentive system for measuring preferences. Prince combines the tractability of direct matching, allowing for the precise and direct elicitation of indifference values, with the clarity and validity of choice lists. It makes incentive compatibility completely transparent to subjects, avoiding the opaqueness of the B...

Accounting for ambiguity aversion in dynamic decisions generally implies that either dynamic consistency or consequentialism must be given up. To gain insight into which of these principles better describes people’s preferences, we tested them using a variation of Ellsberg’s three-color urn experiment. Subjects were asked to make a choice both befo...

Diagnostic tests allow better informed medical decisions when there is uncertainty about a patient’s health status and, therefore, about the desirability to undertake treatment. This paper studies the relation between the expected value of diagnostic information and a patient's risk aversion. We show that the ex ante value of diagnostic information...

Prevention efforts, such as quitting smoking, flu vaccination, and exercising, are of crucial importance in health policy, but people tend to undertake too few of them. The main reason is that most prevention efforts only reduce but do not completely eliminate the risk of poor health. This makes it harder for people to assess the benefits of preven...

People’s beliefs about uncertain events play a pivotal role in real-world decisions. Examples include entrepreneurs who have to assess the chance that their business activities will be successful, patients who have to decide on a risky treatment, and policy makers who have to assess the risks of climate change. Existing methods to measure beliefs a...

Quality-Adjusted Life-Years (QALYs) are typically derived from individual preferences over health episodes. This paper reports the first experimental investigation into the effects of collective decision making on health valuations, using both time trade-off (TTO) and standard gamble (SG) tasks. We investigated collective decision making in dyads,...

We present a theoretical model of Rabin’s famous calibration paradox that resolves confusions in the literature and that makes it possible to identify the causes of the paradox. Using suitable experimental stimuli, we show that the paradox truly violates expected utility and that it is caused by reference dependence. Rabin already showed that utili...

Although reference dependence plays a central role in explaining behavior, little is known about the way that reference points are selected. This paper identifies empirically which reference point people use in decision under risk. We assume a comprehensive reference-dependent model that nests the main reference-dependent theories, including prospe...

The value of a statistical life (VSL) is a key parameter in the analysis of government policy. Most policy decisions are made under ambiguity. This paper studies the effect of changes in ambiguity perception on the VSL. We propose a definition of increases in ambiguity perception based on Ekern’s (1980) definition of increases in risk. Ambiguity av...

Data S1. Online Appendix. Measuring Ambiguity Preferences for Health

In most medical decisions, probabilities are ambiguous and not objectively known. Empirical evidence suggests that people's preferences are affected by ambiguity. Health economic analyses generally ignore ambiguity preferences and assume that they are the same as preferences under risk. We show how health preferences can be measured under ambiguity...

Personal decisions about health hazards are the main cause of impaired health and premature death. People smoke and eat too much and exercise too little. The lack of preventive efforts is surprising given their proven effectiveness. Arrow's (1963) classical paper suggested that moral hazard might be a reason for underprevention but Ehrlich and Beck...

This study compares discounting for money and health in a field study. We applied the direct method, which measures discounting independent of utility, in a representative French sample, interviewed at home by professional interviewers. We found more discounting for money than for health. The median discount rates (6.5% for money and 2.2% for healt...

This paper studies the effect of learning information on people’s attitudes toward ambiguity. We propose a method to separate ambiguity attitudes from subjective probabilities and to decompose ambiguity attitudes into two components. Under models like prospect theory that represent ambiguity through nonadditive decision weights, these components re...

This article studies whether measured risk attitudes and athletic success are related. We measured the risk preferences of the players of the Dutch men’s field hockey team, the reigning European champions, and runners-up in the 2012 Olympics and in the 2014 World Championships, and compared those with a matched sample of recreational hockey players...

Nash is famous for many inventions, but it is less known that he, simultaneously with Marschak, also was the first to axiomatize expected utility for risk. In particular, these authors were the first to state the independence condition, a condition that should have been but was not stated by von Neumann and Morgenstern. Marschak’s paper resulted fr...

We introduce a new method to measure the temporal discounting of money. Unlike preceding methods, our method requires neither knowledge nor measurement of utility. It is easier to implement, clearer to subjects, and requires fewer measurements than existing methods.

This paper measures deviations from constant discounting and compares these deviations for health and money. Our measurements make no assumptions about utility and do not require separability of preferences over time. In an experiment, most subjects were decreasingly impatient, but a substantial minority was increasingly impatient. The deviations f...

Prelec’s (1998) compound-invariant family provides an appealing way to model probability weighting and is widely used in empirical studies. Prelec (1998) gave a behavioral foundation for this function, but, as pointed out by Luce (2001), Prelec’s condition is hard to test empirically. Luce proposed a simpler condition, reduction invariance, to char...

This paper investigates the rationality of group decisions versus individual decisions under risk. We study two group decision rules, majority and unanimity, in stochastic dominance and Allais paradox tasks. We distinguish communication effects (the effects of group discussions and interactions) from aggregation effects (mere impact of the voting p...

We propose a simple, parameter‐free method that, for the first time, makes it possible to completely observe Tversky and Kahneman’s (1992) prospect theory. While methods existed to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby...

Case-based decision theory (CBDT) provided a new way of revealing preferences, with decisions under uncertainty determined by similarities with cases in memory. This paper introduces a method to measure CBDT that requires no commitment to parametric families and that relates directly to decisions. Thus, CBDT becomes directly observable and can be u...

We introduce a new type of preference condition for intertemporal choice, which requires present values to be independent of various other variables. The new conditions are more concise and more transparent than traditional ones. They are directly related to applications because present values are widely used tools in intertemporal choice. Our cond...

In their famous 1982 paper in this Journal, Loomes and Sugden introduced regret theory. Now, more than 30 years later, the case for the historical importance of this contribution can be made.

Allowing for sign-dependence in discounting substantially improves the description of people’s time preferences. The deviations from constant discounting that we observed were more pronounced for losses than for gains. Our data also suggest that the discount function should be flexible enough to allow for increasing impatience. These findings chall...

The nature of utility is controversial. Whereas decision theory commonly assumes that utility is context specific, applied and empirical decision analysis typically assumes one unifying concept of utility applicable to all decision problems. This controversy has hardly been addressed empirically because of the absence of methods to measure utility...

Doyle’s (2013) theoretical survey of discount functions criticizes two parametric families abbreviated as CRDI and CADI families. We show that Doyle’s criticisms are based on a mathematical mistake and are incorrect.

Behavioral conditions such as compound invariance for risky choice and constant decreasing relative impatience for intertemporal choice have surprising implications for the underlying decision model. They imply a multiplicative separability of outcomes and either probability or time. Hence the underlying model must be prospect theory or discounted...

Prospect theory is increasingly used to explain deviations from the traditional paradigm of rational agents. Empirical support for prospect theory comes mainly from laboratory experiments using student samples. It is obviously important to know whether and to what extent this support generalizes to more naturally occurring circumstances. This artic...

Many health risks are ambiguous in the sense that reliable and credible information about these risks is unavailable. In health economics, ambiguity is usually handled through sensitivity analysis, which implicitly assumes that people are neutral towards ambiguity. However, empirical evidence suggests that people are averse to ambiguity and react s...

We propose a simple, parameter‐free method that, for the first time, makes it possible to completely observe Tversky and Kahneman’s (1992) prospect theory. While methods existed to measure event weighting and the utility for gains and losses separately, there was no method to measure loss aversion under ambiguity. Our method allows this and thereby...

Quality-Adjusted Life Years (QALYs) are the most widely used measure of health in economic evaluations of health care. Within a welfarist framework QALYs are consistent with people's preferences under stringent assumptions. Several authors have argued that QALYs are a valid measure of health within an extra-welfarist framework. This paper studies t...

Time discounting and quality of life are two important factors in evaluations of medical interventions. The measurement of these two factors is complicated because they interact. Existing methods either simply assume one factor given, based on heuristic assumptions, or invoke complicating extraneous factors, such as risk, that generate extra biases...

Utility independence is a central condition in multiattribute utility theory, where attributes of outcomes are aggregated in the context of risk. The aggregation of attributes in the absence of risk is studied in conjoint measurement. In conjoint measurement, standard sequences have been widely used to empirically measure and test utility functions...

Unweighted summation or quality-adjusted life year (QALY) utilitarianism is the most common way to aggregate health benefits in a cost-effectiveness analysis. A key qualitative principle underlying QALY utilitarianism is separability: those individuals unaffected by a policy choice should not influence the policy choice. Separability also underlies...

This paper introduces time-tradeoff (TTO) sequences as a general tool to analyze intertemporal choice. We give several applications. For empirical purposes, we can measure discount functions without requiring any measurement of or assumption about utility. We can quantitatively measure time inconsistencies and simplify their qualitative tests. TTO...

In economic decisions we often have to deal with uncertain events for which no probabilities are known. Several normative models have been proposed for such decisions. Empirical studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces the source method, a tractable method for quant...

Gandjour and Gafni (in press) criticize our paper on two counts. Their first point of criticism is ill-founded and results from many mathematical mistakes that they make. The second is due to a lack of understanding of the general principles of empirical research.

This paper introduces a choice-based method that for the first time makes it possible to quantitatively measure regret theory, one of the most popular models of decision under uncertainty. Our measurement is parameter-free in the sense that it requires no assumptions about the shape of the functions reflecting utility and regret. The choice of stim...

Most health care evaluations today still assume expected utility even though the descriptive deficiencies of expected utility are well known. Prospect theory is the dominant descriptive alternative for expected utility. This paper tests whether prospect theory leads to better health evaluations than expected utility. The approach is purely descript...

This article provides a parameter-free measurement of utility in intertemporal choice and presents new and more robust evidence on the discounting of money outcomes. Intertemporal utility was concave for gains and convex for losses, consistent with a hypothesis put forward by Loewenstein and Prelec (1992). Discount rates declined over time but less...

The person tradeoff (PTO) is commonly used in health economic applications. However, to date it has no theoretical basis. The purpose of this paper is to provide this basis from a set of assumptions that together justify the most common applications of the PTO method. Our analysis identifies the central assumptions in PTO measurements. We test thes...

A central assumption in health utility measurement is that preferences are invariant to the elicitation method used. This assumption is challenged by preference reversals. Previous studies have observed preference reversals between choice and matching tasks and between choice and ranking tasks. We present a preference reversal that is entirely deri...

a b s t r a c t Many traditional conjoint representations of binary preferences are additively decomposable, or additive for short. An important generalization arises under rank-dependence, when additivity is restricted to cones with a fixed ranking of components from best to worst (comonotonicity), leading to configural weighting, rank-dependent u...

This paper performs new tests of the QALY model when health varies over time. Our tests do not involve confounding assumptions and are robust to violations of expected utility. The results support the use of QALYs at the aggregate level, i.e. in economic evaluations of health care. At the individual level, there is less support for QALYs. The indiv...

Traditionally aversion to health inequality is modelled through a concave utility function over health outcomes. Bleichrodt et al. [Bleichrodt, H., Diecidue E., Quiggin J., 2004. Equity weights in the allocation of health care: the rank-dependent QALY model. Journal of Health Economics 23, 157-171] have suggested a "dual" approach based on the intr...

A common assumption in health policy studies is QALY-maximization: Policies yielding greater QALYs are preferred to those yielding fewer QALYs. However, most empirical studies report aversion to inequality, or the desire to sacrifice some QALYs to obtain a more equal distribution of health in the population. Notably, studies to date present distrib...

A common assertion is that rating scale (RS) values are lower than both standard gamble (SG) and time tradeoff (TTO) values. However, differences among these methods may be due to method specific bias. Although SG and TTOs suffer systematic bias, RS responses are known to depend on the range and frequency of other health states being evaluated. Ove...

This paper provides an efficient method to measure utility under prospect theory, the most important descriptive theory of decision under uncertainty today. Our method is based on the elicitation of certainty equivalents for two-outcome prospects, a common way to measure utility. We applied our method in an experiment and found that most subjects w...

A growing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes...

Gul’s theory of disappointment aversion (DA) has several attractive features, being intuitive, analytically tractable, and parsimonious. In spite of this, the DA model has received little attention in practical applications, which may be partly due to the absence of a procedure to elicit the model. We show how the tradeoff method, developed by Wakk...

This paper tests the consistency of health utility measurements with individual preferences. We compare three methods, the time trade-off, the standard gamble and a version of the standard gamble that corrects for the deviations from expected utility modelled by prospect theory. Individual preferences are measured both through a ranking task and th...

A central assumption in health utility measurement is that preferences are invariant to the elicitation method that is used. This assumptioin is challenged by preferences reversals. Previous studies have observed prefrence resersals between choise and matching tasks and between choise and ranking tasks. We present a new preference reversal that ent...

Abstract This paper proposes a new method,to measure the utility of life duration. A major advantage of our method, as opposed to existing methods for the measurement of the utility of life

The empirical literature on the measurement of health inequalities is vast and rapidly expanding. To date, however, no foundation in welfare economics exists for the proposed measures of health inequality. This paper provides such a foundation for commonly used measures like the health concentration index, the Gini index, and the extended concentra...

The classic preference reversal phenomenon arises in a comparison between a choice and a matching task. We present a new type of preference reversal which is entirely choice-based. Because choice is the basic primitive of economics, the preference reversal we observe is more troubling for economics. The preference reversal was observed in two exper...

This paper explores inconsistencies that occur in utility measurement under risk when expected utility is assumed and the contribution that prospect theory and some other generalizations of expected utility can make to the resolution of these inconsistencies. We used five methods to measure utilities under risk and found clear violations of expecte...

This paper explores how to evaluate changes in survival probabilities when people do not process probabilities linearly, as is commonly assumed in the literature, but distort probabilities. We show that the valuation of risks to life depends critically on two parameters: the elasticity of the probability weighting function and the elasticity of the...

We study the willingness to pay for reductions in health risks when people do not evaluate probabilities linearly, as is commonly assumed in elicitations of willingness to pay, but weight probabilities, as is commonly observed in empirical studies of decision under risk. We show that for the levels of baseline risk typically considered, probability...

We performed an empirical elicitation of the equity-efficiency trade-off in cost-utility analysis using the rank-dependent quality-adjusted life-year (QALY) model, a model that includes as special cases many of the social welfare functions that have been proposed in the literature. Our elicitation method corrects for utility curvature and, therefor...

This paper examines applications of non-expected utility in the health domain. The most widely used utility model in health economics, the time-linear QALY model, assumes (i) separability of quality of life and life duration, and (ii) linearity of the utility for life duration. We perform new tests, which are robust to violations of expected utilit...

We provide a new test of the feasibility of using contingent valuation to value informal care. We start with a theoretical model of informal caregiving and derive that willingness to pay depends positively on wealth and negatively on own health, whereas the effect of other's health is sign-ambiguous. These predictions are tested in two new data set...

This paper explores biases in the elicitation of utilities under risk and the contribution that generalizations of expected utility can make to the resolution of these biases. We used five methods to measure utilities under risk and found clear violations of expected utility. Of the theories studies, prospect theory was most consistent with our dat...

In this note we use the rank-dependent utility (RDU) model to analyze saving decisions. The RDU model enables us to separate the effects of pessimism and optimism on saving from that of concavity of the utility function. While pessimism induces more saving, the importance of this effect is shown to depend upon properties of the utility function suc...

Previous empirical tests of quality-adjusted life-years (QALYs), the most widely used outcome measure in economic evaluations of health care, generally yielded negative results. These tests were, however, for the most part based on expected utility, which is now widely acknowledged to be descriptively inaccurate. The observed violations might, ther...

This paper introduces the rank-dependent quality-adjusted life-years (QALY) model, a new method to aggregate QALYs in economic evaluations of health care. The rank-dependent QALY model permits the formalization of influential concepts of equity in the allocation of health care, such as the fair innings approach, and it includes as special cases man...

This paper tests the internal consistency of time trade-off utilities. We find significant violations of consistency in the direction predicted by loss aversion. The violations disappear for higher gauge durations. We show that loss aversion can also explain that for short gauge durations time trade-off utilities exceed standard gamble utilities. O...

Medical decision analyses typically focus on one disease, that is, on one source of risk. In many medical decisions multiple sources of risk co-exist, however. This paper analyzes the effect of such comorbidities on treatment decisions. The effect of comorbidities on treatment decisions depends primarily on the way in which the patient's attitude t...

We show that the willingness to pay for health improvements increases with the severity and probability of occurrence of comorbidities. This result, which is obtained under mild restrictions on the shape of the utility function, has important implications for cost benefit studies applied to health care. In particular it implies that the discriminat...

This paper tests the internal consistency of time trade-off utilities. We find significant violations of consistency in the direction predicted by loss aversion. The violations disappear for higher gauge durations. We show that loss aversion can also explain that for short gauge durations time trade-off utilities exceed standard gamble utilities. O...

Quality-adjusted life-years (QALYs) are the most common utility measure in medical decision analysis and economic evaluations of health care. This paper presents an axiomatization of QALYs under cumulative prospect theory (CPT), currently the most influential model for decision under uncertainty. Because the set of health states need not be endowed...

This paper gives a new explanation for the systematic disparity between standard gamble (SG) utilities and time trade-off (TTO) utilities. The common explanation, which is based on expected utility, is that the disparity is caused by curvature of the utility function for duration. This explanation is, however, incomplete. People violate expected ut...

In cost-utility analysis it is assumed that health state valuations are directly comparable across individuals. Instead, health state valuations may be relative and related to people's expectations and abilities. Then health state valuations are not fully comparable across people and, consequently, cost utility analysis cannot be applied in full. T...

This paper studies two important explanations of why people violate procedure invariance: loss aversion and scale compatibility. The paper extends previous research by studying loss aversion and scale compatibility simultaneously and in a quantitative manner, by looking at a new decision domain, medical decision making, and by using an experimental...

This paper presents a context-dependent theory of decision under risk. The relevant contextual factor is the presence of a riskless lottery in a preference comparison. The theory only deviates from expected utility if the set of options contains both riskless and risky lotteries. The main motivation for the theory is to explain the gambling effect....

Cost-effectiveness analysis, which ranks projects by quality adjusted life years gained per dollar spent, is widely used in the evaluation of health interventions. We show that cost effectiveness analysis can be derived from two axioms: society prefers Pareto improvements and society values discounted life years, lived in perfect health, equally fo...