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Expected utility with threshold disappointment sensitivity

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  • Honda, Edward

Abstract

We axiomatize a representation for preferences over lotteries. In the model, an agent is a standard expected utility maximizer satisfying risk neutrality when the probability of disappointing prizes are sufficiently low, but becomes sensitive and places extra weight on such prizes when the probability is too large. Such a decision maker may exhibit violations of Independence. The model can also be consistent with a type of behavior observed in the Allais Paradox.

Suggested Citation

  • Honda, Edward, 2022. "Expected utility with threshold disappointment sensitivity," Economics Letters, Elsevier, vol. 213(C).
    • Handle: RePEc:eee:ecolet:v:213:y:2022:i:c:s0165176522000441
    DOI: 10.1016/j.econlet.2022.110350
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    References listed on IDEAS

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    1. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
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    4. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
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    6. Marina Agranov & Pietro Ortoleva, 2017. "Stochastic Choice and Preferences for Randomization," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 40-68.
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    More about this item

    Keywords

    Expected utility; Independence; Lottery;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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