A contextual range-dependent model for choice under risk

We introduce a context-dependent theory for choice under risk, called range utility theory. It builds on Parducci’s range principle from psychophysics and modifies expected utility by positing that risky prospects are evaluated relative to the range of consequences of all prospects in the decision context. When the context is fixed, choices typically exhibit the four-fold pattern of risk preferences, yet are fully consistent with expected utility (linear in probabilities) without invoking rank-principles. We illustrate this advantage in game theory contexts. As the same time, when the context varies, the relative value of an alternative also does, yielding different forms or preference reversals, some of which have been robustly documented.