Edited by Stephane Hess and Andrew Daly
Throughout the history of modelling choice under risk and uncertainty there has been a productive interaction between modelling and experimental testing of those models. Sometimes the experiments have (initially, at least) been ‘thought experiments’, or experiments conducted informally with small samples of workshop/seminar participants – see Allais (1953) and Ellsberg (1961). Subsequently, experiments have been conducted more formally with much larger samples, many (although not all) of which have generated patterns of response which appear to contravene at least one basic standard axiom or postulate of expected utility theory (EUT) and have thereby stimulated the development of new models. Other experimental phenomena – preference reversals (Lichtenstein and Slovic, 1971) and disparities between willingness to pay and willingness to accept (Knetsch and Sinden, 1984), for example – have also been highly influential. Experiments have looked not only at choices under risk and uncertainty, but more broadly at choices between various kinds of goods and services, as well as choices with a temporal dimension; and they have investigated not just choices but other methods of eliciting people’s preferences – for example, different kinds of scoring systems and equivalence techniques. However, the focus of this chapter is primarily on risky choices of the kind that have been most commonly used in ‘laboratory’ experiments; namely, choices between simple lotteries involving various probabilities of no more than three possible outcomes in total. Some remarks about the implications of this body of data for other kinds of choices and preference elicitation procedures are made in the concluding section.
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