Mohammed Abdellaoui

HEC Paris | HEC · Decision Sciences and Economics

Foundations are provided for rank-dependent preferences within the popular two-stage framework of Anscombe–Aumann, in which risk and ambiguity feature as distinct sources of uncertainty. We advance the study of attitudes towards ambiguity without imposing expected utility for risk. As a result, in our general model, ambiguity attitude can be captur...

This paper reports two experiments in which attitudes toward temporal risk resolution is elicited from choices between two-outcome lotteries that pay out at some future fixed date and can be resolved either now or later. We show that matching probabilities provides a simple method to measure attitudes toward temporal resolution—via the utility scal...

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...

We investigate time discounting under risk. To this end, we modify a popular multiple price list (MPL) design to elicit time discounting. Structural estimations of model parameters yield several new insights. For one, we find present bias to persist under risk, contrary to some previous evidence from the psychology literature. We further confirm th...

This paper investigates “asymmetries” between non-monetary gains and losses in intertemporal choice. We considered gains and losses of spare/working time with respect to a reference duration defined in a working contract. Specifically, we elicited a behavioral model of intertemporal choice that accounts for a gain/loss-dependent discounting functio...

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...

We conduct experiments measuring individual behavior under compound risk, simple risk, and ambiguity. We focus on (1) treatment of compound risks relative to simple risks and (2) the relationship between compound risk attitudes and ambiguity attitudes. We find that compound risks are valued differently than corresponding reduced simple risks. These...

Uncertainty pervades most aspects of life. From selecting a new technology to choosing a career, decision makers rarely know in advance the exact outcomes of their decisions. Whereas the consequences of decisions in standard decision theory are explicitly described (the decision from description (DFD) paradigm), the consequences of decisions in the...

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...

In this article, we elicit both individuals’ and couples’ preferences assuming prospect theory (PT) as a general theoretical framework for decision under risk. Our experimental method, based on certainty equivalents, allows to infer measurements of utility and probability weighting at the individual level and at the couple level. Our main results a...

Published as "Beware of black swans: Taking stock of the description–experience gap in decision under uncertainty," Marketing Letters, Springer, vol. 25(3), pages 269-280, September. Uncertainty pervades most aspects of life. From selecting a new technology to choosing a career, decision makers often ignore the outcomes of their decisions. In the...

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...

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...

This paper reports on the results of an experimental elicitation at the individual level of all prospect theory components (i.e., utility, loss aversion, and weighting functions) in two decision contexts: situations where alternatives are described as probability distributions and situations where the decision maker must experience unknown probabil...

Risk attitude is known to be a key determinant of various economic and financial choices. Behavioral studies that aim to evaluate the role of risk attitudes in contexts of this type, therefore, require tools for measuring individual risk tolerance. Recent developments in decision theory provide such tools. However, the methods available can be time...

Intertemporal decision making under risk involves two dimensions: time preferences and risk preferences. This paper focuses on the impact of time on risk preferences, independent of the intertemporal trade-off of outcomes, i.e., time preferences. It reports the results of an experimental study that examines how delayed resolution and payment of ris...

We often deal with uncertain events for which no probabilities are known. Several normative models have been proposed. Descriptive studies have usually been qualitative, or they estimated ambiguity aversion through one single number. This paper introduces the source method, a tractable method for quantitatively analyzing uncertainty empirically. Th...

This paper presents a preference foundation for a two-parameter family of probability weighting functions. We provide a theoretical link between the well-established notions of probabilistic risk attitudes (i.e., optimism and pessimism) used in economics and the important independent measures for individual behavior used in the psychology literatur...

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...

This paper study decision-making under risk and decision-making over time made by couples. We performed a joint experimental elicitation of risk and time preferences both for couples and for their individual members. We used general behavioral models of decision under risk and over time and measured utility, probability weighting, and discounting....

Introduction Introduction to utility theory Decomposition under certainty Decompositions under uncertainty Elicitation of utility functions Conclusion Bibliography

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...

Rank-dependent utility (RDu) is among the most popular generalizations of the standard model of expected utility. It takes into account the main violations of expected utility (Allais paradox, Ellsberg paradox). Furthermore, the replacement of probabilities by decision weights allows us to capture what may be called "chance attitude" in addition to...

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...

We all feel that our world is fundamentally uncertain. But less unanimity emerges as to what we mean by "uncertainty" and how we ought to adjust. Businessmen tend to be "cautious" and engineers to pick up the "right" decision criteria among the many available in the literature, without having much justification about their respective behaviors. Thi...

In an experiment, choice-based (revealed-preference) utility of money is derived from choices under risk, and choiceless (non-revealed-preference) utility from introspective strength-of-preference judgments. The well-known inconsistencies of risky utility under expected utility are resolved under prospect theory, yielding one consistent cardinal ut...

The two versions of prospect theory, original prospect theory ( OPT; Kahneman and Tversky, 1979) and cumulative prospect theory (CPT; Tversky and Kahneman, 1992), use different composition rules to combine the value function and the probability weighting function and hence value gambles with two or more non-zero outcomes differently. Previous tests...

This paper introduces the likelihood method for decision under uncertainty. The method allows the quantitative determination of subjective beliefs or decision weights without invoking additional separability conditions, and generalizes the Savage–de Finetti betting method. It is applied to a number of popular models for decision under uncertainty...

As the standard theory of rational choice under uncertainty, expected utility represents a key building block of the economic theory. This rational choice theory has the advantage of resting on solid axiomatic foundations. The present chapter reviews these foundations from normative and descriptive point of views. Then, some of the most promising g...

This paper reports the results of an experimental parameter-free elicitation and decomposition of decision weights under uncertainty. Assuming cumulative prospect theory, utility functions were elicited for gains and losses at an individual level using the tradeoff method. Subsequently, decision weights were elicited through certainty equivalents o...

This paper uses "revealed probability trade-offs" to provide a natural foundation for probability weighting in the famous von Neumann and Morgenstern axiomatic set-up for expected utility. In particular, it shows that a rank-dependent preference functional is obtained in this set-up when the independence axiom is weakened to stochastic dominance an...

Tversky and Kahneman's Cumulative Prospect Theory (CPT) can be seen as one of the leading descriptive theories of decision making under uncertainty. We conducted an experimental study to characterize utility function and decision weights of CPT, employing a two-step procedure based on the trade-off method. As a first step, we elicit the utility fun...

This paper uses laboratory experiments as tools allowing to weigh comparatively some of the new models of decision making under risk which have been proposed in the last twenty years to describe behavior towards risk. These models rest on diverging interpretations of the observed gaps with respect to the expected utility model. The interpretation p...

This paper proposes a two-step method to successively elicit utility functions and decision weights under rank-dependent expected utility theory and its "more descriptive" version: cumulative prospect theory. The novelty of the method is that it is parameter-free, and thus elicits the whole individual preference functional without imposing any prio...

Experimental research has shown that preference functionals which describe individual choices under risk vary according to which particular type of lottery individuals have to consider. A « risk-structure » can thus be defined as a subset of prospects sufficiently ‘close’ from each other to trigger the same procedural search from the individual and...

In this paper, we aim at obtaining, from an experimental design in decision makingunder risk, richer and more appropriate information for management scientists involved indecision7dash;aiding. We design a method of direct elicitation of individual indifference curvesin the Marschak Machina triangle (i.e., the set of all probability distributions ov...

La caractéristique principale d'un modèle à fonctionnelle de préférence dépendant des rangs des conséquences est de permettre, en plus de la prise en compte de la transformation subjective de celles-ci, comme c'est le cas dans le modèle de l'utilité espérée, la transformation subjective des probabilités objectives. Cet article expose les résultats...

[eng] Our paper presents some results of an experimental study comparing the des­criptive power of the Expected Utility (EU) model and of a Rank Dependent Utility (RDU) Model allowing the decision maker to subjectively transform objective pro­babilities. The descriptive power of the EU model and of a RDU model is evaluated by mean of two indexes co...

In view of the considerable evidence of systematic violations of expected utility by individual subjects, a number of alternative models generalizing expected utility have been developed. As P.Fishburn put it once [1988], we have entered “a new era” in the domain of decision under risk, but “we shall have to wait and see” during the “time of shaked...

Our paper is an experimental inquiry into individual behavior under risk; we examine individual arbitrage between probabilities and payments in choosing among elementary lotteries and compare it to arbitrage predicted by expected utility theory. We draw from this empirical evidence some consequences concerning the form of the preference functional....

Uncertainty and Information Modeling.- Revealed Ambiguity and Its Consequences: Updating.- Dynamic Decision Making When Risk Perception Depends on Past Experience.- Representation of Conditional Preferences Under Uncertainty.- Subjective Information in Decision Making and Communication.- Risk Modeling.- Sensitivity Analysis in Decision Making: A Co...

Utility has been a controversial concept throughout the history of economics, with interpretations shifting over time. After Bentham's (1789) intuitive discussions, the marginalist revolution of around 1870 and the ordinal revolution at the beginning of the 20 th century significantly deepened our understanding (Blaug 1962). Nowadays, utility is co...

Whether we like it or not we all feel that the world is uncertain. From choosing a new technology to selecting a job, we rarely know in advance what outcome will result from our decisions. Unfortunately, the standard theory of choice under uncertainty developed in the early forties and fifties turns out to be too rigid to take many tricky issues of...