Strength of preference and risk attitude in utility measurement

Abstract

A relationship between a value function v (compatible with the theory of ordered value differences) and a utility function u (compatible with the expected utility theory) is explored. According to a behavioral interpretation, v encodes the strength of preference while u encodes the strength of preference and risk attitude. The results of two experiments (one conducted in a real-world setting and another in a laboratory) involving 24 cases and the data reported in the literature involving 10 cases support the constant relavie risk attitude hypothesis. The implied unique transformation between v and u is tested as a descriptive model and as a predictive model. The descriptive model is then used for inference concerning several behavioral hypotheses.