Comonotonic independence: The critical test between classical and rank-dependent utility theories

Peter Wakker, Ido Erev, Elke U. Weber

Research output: Contribution to journalArticle

60 Scopus citations

Abstract

This article compares classical expected utility (EU) with the more general rank-dependent utility (RDU) models. The difference between the independence condition for preferences of EU and its comonotonic generalization in RDU provides the exact demarcation between EU and rank-dependent models. Other axiomatic differences are not essential. An experimental design is described that tests this difference between independence and comonotonic independence in its most basic form and is robust against violations of other assumptions that may confound the results, in particular the reduction principle and transitivity. It is well known that in the classical counterexamples to EU, comonotonic independence performs better than full-force independence. For our more general choice pairs, however, we find that comonotonic independence does not perform better. This is contrary to our prior expectation and suggests that rank-dependent models, in full generality, do not provide a descriptive improvement over EU. For rank-dependent models to have a future, submodels and choice situations need to be identified for which rank-dependence does contribute descriptively.

Original languageEnglish (US)
Pages (from-to)195-230
Number of pages36
JournalJournal of Risk and Uncertainty
Volume9
Issue number3
DOIs
StatePublished - Dec 1994
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Keywords

  • comonotonicity
  • independence
  • nonexpected utility
  • prospect theory
  • rank-dependence

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