Selection by proxy: A model for the simplification of decision under risk and under uncertainty (Q1100981)

The method of ``Selection by proxy'' is a model to simplify decision making under risk, belonging to the field of normative decision theory. The principles were formulated by \textit{D. Kahneman} and \textit{A. Tversky} [Econometrica 47, 263-291 (1979; Zbl 0411.90012)] and the model was first proposed by \textit{O. Hagen} [Theory Decis. 18, 31-45 (1985)] as the ``three-moments-model''. Hagen proposes that each choice between alternative n-outcome-games can be substituted by the choice between equivalent 2-outcome games. 2-outcome games are to be regarded as equivalent if the expected value (E(X)), variance (Var(X)) and a factor Z are equal to the same values in the n-outcome games. The factor Z is the quotient of the third central moment and the variance \((M_ 3/S^ 2).\) \[ Z=\frac{E([X-E(X)]^ 3)}{Var(X)}. \] As so far to our knowledge no solution has yet been published for this model, we have devoted our efforts to solving it. We found that the factor Z is not useable because the values for p and 1-p (the probabilities of the out-comes of the 2- outcome game) can then exceed the limits of the range [0,1]. So instead of Z we used the variable skewness \((=M_ 3/S^ 3)\) and thus get a function for p which is defined within the range of [0,1] for each possible value of the skewness. Expected value and variance are the same as above but the new factor for the skewness is \[ \frac{E([X-E(X)]^ 3)}{(Var(X))^{3/2}} = \frac{E(X^ 3)-3E(X)E(X^ 2) + 2(E(X))^ 3}{(E(X^ 2)-(E(X))^ 2)^{3/2}}. \] Our paper contains the following parts: Solution of the modified three-moments model; results of the empirical test.