Template-Type: ReDIF-Paper 1.0 
Title: When 0 + 1/3+1/3>2/3, but 0 + 0 +1/3 <1/3. How the median outcome impacts lottery valuation?
Author-Name: Krzysztof Kontek 
Author-Name: Michael Birnbaum 
Abstract: This paper presents the results of two experiments that exhibit monotonicity violations: some lotteries with three equally likely outcomes are valued more than a superior two-outcome lottery,while others are valued less than an inferior two-outcome lottery. Moreover the experimentaldata provide compelling evidence that lottery valuation strongly depends on the value(s)of the middle outcome(s). This contradicts the claim of Cumulative Prospect Theory(CPT) that middle outcomes are assigned lower weights than the extreme ones. Both effectscan be observed in the case of four-outcome lotteries. The patterns are persistent for variouspayoff schedules, and have been observed for subjects from both Poland and California. Incorporatingthe median outcome value into any modeling of risky decision-making enables theseeffects to be explained. This paper demonstrates that a simple weighted Expected Utility - Medianmodel describes data involving two- three-, and four-outcome lotteries more accuratelythan CPT. Moreover, it offers an alternative explanation of ''overweighting'' of small probabilities,and ''underweighting'' of large ones – phenomena postulated by CPT.
Number: 2016-016
Length: 36 pages 
Creation-Date: 2016-09
Keywords: decision - making under risk, monotonicity violations, Expected Utility Theory (EUT), Cumulative Prospect Theory, median
Classification-JEL: D81
File-URL: https://hdl.handle.net/20.500.12182/1150
File-Format: Application/pdf
DOI: 10.33119/kaewps2016016
Handle: RePEc:sgh:kaewps:2016016