Journal of Economic Behavior Organization Vol. 41 2000 277–297
Do non-expected utility choice patterns spring from hazy preferences? An experimental study of choice ‘errors’
D.J. Butler
Department of Economics, University of Western Australia, Nedlands, WA 6907, Australia Received 27 January 1997; accepted 25 February 1999
Abstract
Individuals often have only incompletely known preferences when choosing between pair-wise gambles. Particular presentations of the choice problem may then passively encourage the use of
some choice method to clarify the preference. Different presentational displays can then lead to choice patterns predicted by one or other Generalised Expected Utility theory. When a preference
is not or cannot be constructed, choices will be arbitrary.
I run an experiment that uses three different presentational displays and incorporates a ‘strength of preference indicator’. The experiment investigates regret theory as an example of a Gener-
alised Expected Utility theory. As preference strength is found to vary by display, regret effects, event-splitting effects and choice reversals are all found to be display dependent. It is suggested
that the evidence is best explained by assuming incomplete EU preferences which are clarified by constructive heuristics, rather than some Generalised Expected Utility model coupled with an error
term. ©2000 Elsevier Science B.V. All rights reserved.
JEL classification: C91; D81 Keywords: Expected utility; Regret; Event-splitting effects; Incompleteness; Errors
1. Introduction
Although Expected Utility EU theory remains the basis for economists’ work in the area of choice under uncertainty, there is widespread recognition of its descriptive limitations
see Camerer, 1995. Economists have responded to this weakness by developing more general non-expected utility theories that are still utility theories. But as Friedman 1989
pointed out, the strategy of refining preference structures is a retrograde one because the predictive power of the original theory is being weakened rather than strengthened.
Psychologists’ efforts to explain systematic violations of the Expected Utility axioms led to the alternative strategy of incorporating perception effects, and the development of
0167-268100 – see front matter ©2000 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 7 - 2 6 8 1 9 9 0 0 0 7 7 - 3
278 D.J. Butler J. of Economic Behavior Org. 41 2000 277–297
Behavioural Decision Research. This strategy presupposes that human cognitive processes are limited and proposes various non-utility models of decision processes. There are two
compensatory choice processes, and numerous non-compensatory processes see Payne et al., 1993. Compensatory decision processes confront the trade-offs between probabilities
and consequences and can lead to choices consistent with Expected Utility and other utility theories. Non-compensatory rules, for example Majority of Confirming Decisions MCD
and Elimination By Aspects EBA, are usually less cognitively expensive but are harder to defend as rational.
Buschena and Zilberman 1995 show that both the economists’ and psychologists’ ap- proaches alone are inadequate. They argue a more general paradigm is needed to capture
choice behaviour and account for choice reversals. A number of papers by Georgescu-Roegen 1966 address the issue of psychological thresholds in perception, and the consequences
of assuming the individual is not a ‘. . . perfect choosing instrument’. This paper contends that one of those consequences could provide the foundation for a more general paradigm.
By incorporating the perception effects into Expected Utility theory as the psychologists advocate, the process of preference construction may give rise to both choice patterns con-
sistent with Generalised Expected Utility GEU and choice reversals errors. Section 2 of this paper presents the argument and Section 3 describes an exploratory experiment to test
some of the implications. Section 4 discusses the findings in light of the recent literature, and concludes.
2. Consequences of incomplete preferences
