Finance and economics theorists assume preferences predicted by expected utility (EU) theory hold at the market level even as evidence mounts that some of those predictions are violated at the individual level. The objective of this project is to determine the role of markets in disciplining behavior toward EU outcomes. Specifically, is the distribution of EU violations different if subjects participate in market-level decisions before individual- level decisions? Do market design and gain versus loss payoffs affect the degree of discipline provided by markets? Without empirical empirical evidence that EU holds at the market level while its predictions are violated at the individual level, the disciplines of finance and economics are ignoring possible weaknesses in the models and opportunities to improve them. Proposed laboratory experiments will record subjects' individual-level preferences for pairs of gambles which are selected with specific constraints. Subjects will be given the opportunity to participate in markets for these gambles. Individual and market preferences will be compared with those predicted by EU theory. If the preferences violate EU theory at the individual level but support it at the market level, there is empirical support for the robustness of economic and finance models dependent upon the EU assumption. If the preferences do not support EU at the market level, then these models may have to be reformulated independently of the EU assumption.
