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The Shape of Utility Functions and Organizational Behavior

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Author Info

  • Joost M. E. Pennings

    ()
    (University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, Marketing/Decision Sciences Group, 1301 West Gregory Drive, Urbana, Illinois 61801)

  • Ale Smidts

    ()
    (Wageningen University, Department of Social Sciences, Marketing and Consumer Behavior Group, Hollandseweg 1, 6706 KN Wageningen, The Netherlands, and Rotterdam School of Management, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands)

Abstract

Based on measurements among 332 owner-managers, we investigate how the global shape of the utility function (i.e., S-shaped versus concave or convex over the total range of outcomes) relates to choice behavior. We find that the global shape of the utility function differs across decision makers (about one-third of the owner-managers exhibit an S-shaped utility function) and that the global shape is linked to organizational behavior (i.e., the production system employed), a result that does not change when using different methods to identify the decision maker's global shape of the utility function. The decision maker's risk attitude (risk averse or risk seeking) does not affect the choice of the production system. Whereas the degree of risk aversion, based on the local shape of the utility function, may be important in explaining owner-managers' trading behavior (Pennings and Smidts 2000), more structural organizational behavior appears to be linked to the global shape of the utility function.

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File URL: http://dx.doi.org/10.1287/mnsc.49.9.1251.16566
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 49 (2003)
Issue (Month): 9 (September)
Pages: 1251-1263

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Handle: RePEc:inm:ormnsc:v:49:y:2003:i:9:p:1251-1263

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Keywords: Heterogeneity in Utility Functions; Organizational Behavior; S-Shaped Utility Function; Real Decision Makers; Reference Points;

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Cited by:
  1. Ali E. Abbas & James E. Matheson & Robert F. Bordley, 2009. "Effective utility functions induced by organizational target-based incentives," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(4), pages 235-251.
  2. Van Ittersum, Koert & Pennings, Joost M.E. & Wansink, Brian & van Trijp, Hans C.M., 2007. "The validity of attribute-importance measurement: A review," Journal of Business Research, Elsevier, vol. 60(11), pages 1177-1190, November.
  3. Christopher Schwand & Rudolf Vetschera & Lea Wakolbinger, 2010. "The influence of probabilities on the response mode bias in utility elicitation," Theory and Decision, Springer, vol. 69(3), pages 395-416, September.
  4. Pennings, Joost M.E. & Isengildina, Olga & Irwin, Scott H. & Good, Darrel L., 2004. "The Impact of Market Advisory Service Recommendations on Producers' Marketing Decisions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(02), August.
  5. Wing-Keung Wong & Raymond H. Chan, 2005. "Prospect and Markowitz Stochastic Dominance," Development Research Unit Working Paper Series 08/05, Monash University, Department of Economics.
  6. Quang Nguyen, 2011. "Does nurture matter: Theory and experimental investigation on the effect of working environment on risk and time preferences," Journal of Risk and Uncertainty, Springer, vol. 43(3), pages 245-270, December.
  7. Nathalie Etchart-Vincent, 2009. "The shape of the utility function under risk in the loss domain and the 'ruinous losses' hypothesis: some experimental results," Post-Print hal-00395871, HAL.
  8. Peter Wakker & Danielle Timmermans & Irma Machielse, 2007. "The effects of statistical information on risk ambiguity attitudes, and on rational insurance decisions," Natural Field Experiments 00338, The Field Experiments Website.
  9. Lin, Hua & Fortenbery, T. Randall, 2006. "Risk Premiums and the Storage of Agricultural Commodities," Staff Paper Series 504, University of Wisconsin, Agricultural and Applied Economics.
  10. McAlvanah, Patrick, 2010. "Subadditivity, patience, and utility: The effects of dividing time intervals," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 325-337, November.
  11. Peter Wakker & Veronika Köbberling & Christiane Schwieren, 2007. "Prospect-theory’s Diminishing Sensitivity Versus Economics’ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically," Theory and Decision, Springer, vol. 63(3), pages 205-231, November.
  12. Krakovics, Fabio & Eugenio Leal, José & Mendes Jr., Paulo & Lorenzo Santos, Rafael, 2008. "Defining and calibrating performance indicators of a 4PL in the chemical industry in Brazil," International Journal of Production Economics, Elsevier, vol. 115(2), pages 502-514, October.
  13. Schunk, Daniel, 2009. "Behavioral heterogeneity in dynamic search situations: Theory and experimental evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1719-1738, September.
  14. Peel, D.A. & Zhang, Jie, 2012. "On the potential for observational equivalence in experiments on risky choice when a power value function is assumed," Economics Letters, Elsevier, vol. 116(1), pages 8-10.
  15. Ulrich Schmidt & Horst Zank, 2012. "A genuine foundation for prospect theory," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 97-113, October.
  16. Franken, Jason R.V. & Pennings, Joost M.E. & Garcia, Philip, 2012. "Measuring Risk Attitude and Relation to Marketing Behavior," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124471, Agricultural and Applied Economics Association.
  17. Peel, D.A., 2013. "Heterogeneous agents and the implications of the Markowitz model of utility for multi-prize lottery tickets," Economics Letters, Elsevier, vol. 119(3), pages 264-267.
  18. Mattos, Fabio & Garcia, Philip & Pennings, Joost M.E., 2008. "Probability weighting and loss aversion in futures hedging," Journal of Financial Markets, Elsevier, vol. 11(4), pages 433-452, November.
  19. Joost M.E. Pennings & Philip Garcia, 2009. "The informational content of the shape of utility functions: financial strategic behavior," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(2), pages 83-90.
  20. Paolo Pin, 2006. "Selection matters," Working Papers 138, Department of Applied Mathematics, Università Ca' Foscari Venezia.

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