Much behavioral welfare economics assumes that expected utility theory does not accurately describe most human choice under risk. A substantial literature instead evaluates welfare consequences by taking cumulative prospect theory as the natural default alternative, at least where description is concerned. We present evidence, based on a review of previous literature and new experimental data, that the most empirically adequate hypothesis about human choice under risk is that it is heterogeneous, and that where EUT does not apply, more choice is (...) characterized by rank-dependent utility models than by CPT. Most of the apparently loss-averse choice behavior results from probability weighting rather than from direct disutility experienced when an outcome is framed as a loss against an idiosyncratic reference point. We then consider implications of this finding for methodological debates about how to model welfare effects of policies, and argue that abandonment of a dogmatic belief in CPT as the correct theory of risk human choice exposes a conceptual error that is widespread in behavioral welfare economics. We provide concluding reflections on second-order, philosophical issues around the grounding of normative commitments in policy-focused economics. (shrink)

This paper reports an experimental comparison of attitudes toward time and toward money in experience-based decisions. Preferences were elicited under rank-dependent utility for prospects with two or three consequences expressed either in time or in monetary units. Probabilities were unknown but learned through sampling. More specifically, time and money were compared under two conditions. In a first experiment, both consequences and probabilities of prospects were unknown and learned through sequential sampling. In a second experiment, the possible consequences were revealed after (...) the sampling. A real incentive system was implemented for both time and money. The heterogeneity of preferences was assessed for time and for money through individual and mixed modeling estimations. We observe that the nature of consequences (time or money) modifies probability weighting in terms of elevation and sensitivity. Subjects exhibit more optimism and less sensitivity to probability changes when deciding about time than about money. Revealing the consequences impacts the shape of the utility function and leaves probability weighting unchanged. We also observe that the real incentives have no effect except for the reduction in decision errors. This effect is stronger for money than for time. (shrink)

If someone claims that individuals behave as if they violate the independence axiom when making decisions over simple lotteries, it is invariably on the basis of experiments and theories that must assume the IA through the use of the random lottery incentive mechanism. We refer to someone who holds this view as a Bipolar Behaviorist, exhibiting pessimism about the axiom when it comes to characterizing how individuals directly evaluate two lotteries in a binary choice task, but optimism about the axiom (...) when it comes to characterizing how individuals evaluate multiple lotteries that make up the incentive structure for a multiple-task experiment. We reject the hypothesis about subject behavior underlying this stance: we find that preferences estimated with a model that assumes violations of the IA are significantly affected when one elicits choices with procedures that require the independence assumption, as compared to choices elicited with procedures that do not require the assumption. The upshot is that one cannot consistently estimate popular models that relax the IA using data from experiments that assume the validity of the RLIM. (shrink)