Some experimental findings on decision making under risk and their implications

Expected utility (EU) theory is the standard model of decision analysis. Recent experimental studies have however revealed a major problem related to the construction of the utility function which characterizes preferences in the model: The function constructed depends on the assessment method used. These findings are reported and the psychological factors which appear to be responsible for these inconsistencies-the certainty effect and a decision framing effect (reference point shifting)-are described. The applicability of EU theory as a prescriptive model is discussed.