A new explanation for the difference between time trade-off utilities and standard gamble utilities

✍ Scribed by Han Bleichrodt

• Publisher: John Wiley and Sons
• Year: 2002
• Tongue: English
• Weight: 146 KB
• Volume: 11
• Category: Article
• ISSN: 1057-9230
• DOI: 10.1002/hec.688

✦ Synopsis

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 utility and these violations lead to biases in SG and TTO utilities. The paper analyzes the impact on SG and TTO utilities of three main reasons why people violate expected utility: probability weighting, loss aversion, and scale compatibility. In the SG, the combined effect of utility curvature, probability weighting, loss aversion, and scale compatibility is an upward bias. In the TTO these factors lead both to upward and to downward biases. This analysis can also explain the tentative empirical finding that the TTO better describes people's preferences for health than the SG.