Summary: | This paper presents
the results of a study that sheds new light on the shape of indifference curves
in the Marschak-Machina triangle. The most important observation, obtained
non-parametrically, concerns jumps in indifference curves at the triangle legs
towards the triangle origin. These jumps, however, do not appear at the
hypotenuse. The pattern observed suggests discontinuity in lottery valuation
when the range of lottery outcomes changes and is best explained by
decision-making models based on the psychological phenomenon of range
dependence (Parducci, 1965; Cohen, 1992; Kontek and Lewandowski, 2018). Models
founded on other psychological phenomena, e.g., discontinuity in decision
weights (Kahneman and Tversky, 1979), cumulative probability weighting (Tversky
and Kahneman, 1992), attention shifting (Birnbaum, 2008), overweighting of
salient payoffs (Bordallo, Gennaioli and Shefrin, 2012), and treating stated
probabilities as imperfect information (Viscusi, 1989), predict indifference
curve shapes that differ from the one obtained in this study.
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