The Becker-DeGroot-Marschak mechanism and nonexpected utility: A testable approach (Q811313)

The Becker-DeGroot-Marschak mechanism is widely used to elicit decision makers' selling prices of lotteries. This mechanism leads to the preference reversal phenomenon, which seemed to indicate nontransitive preferences. In this article, a sequence of testable hypotheses concerning the connection between the announced selling price and the range of the uniform distribution on [a,b] is suggested. Some of the results do not depend on a specific nonexpected utility functional, but are analyzed within two specific nonexpected utility frameworks - anticipated utility and betweenness. Also, some results concerning the connection between the announced selling price, the expected value of the lottery, and its certainty equivalent are presented. The article has 5 sections. In section 1, the Becker-DeGroot-Marschak mechanism and its connection to the preference reversal phenomenon is described. In section 2, the definitions of the anticipated utility and the betweenness functionals are presented. Section 3 discusses the optimal declared selling price and its connections to the expected value of the lottery and its certainty equivalent. In section 4, some comparative statics, concerning the effects of changes in a and b on the declared selling price, are proved. Section 5 concludes with some final remarks.