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Zpochybnění deskriptivnosti teorie očekávaného užitku
[Doubts about the descriptive validity of the expected utility theory]

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  • Michal Skořepa

Abstract

This paper summarizes the major events in the recent history of modelling human decisions under risk. After presenting the basics of expected utility theory, the key pieces of evidence are described which showed that under certain circumstances, this theory is not descriptively valid. The most promising alternative, cumulative prospect theory, is then presented in some detail, including a brief discussion of how it avoids violations of stochastic dominance and how it explains the above evidence. It is pointed out that there are other empirical observations which cannot be explained by cumulative prospect theory either, so that a model which would explain all evidence on decisions under risk is still to be found.

Suggested Citation

  • Michal Skořepa, 2007. "Zpochybnění deskriptivnosti teorie očekávaného užitku [Doubts about the descriptive validity of the expected utility theory]," Politická ekonomie, Prague University of Economics and Business, vol. 2007(1), pages 106-120.
    • Handle: RePEc:prg:jnlpol:v:2007:y:2007:i:1:id:593:p:106-120
    DOI: 10.18267/j.polek.593
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    16. Birnbaum, Michael H., 2004. "Tests of rank-dependent utility and cumulative prospect theory in gambles represented by natural frequencies: Effects of format, event framing, and branch splitting," Organizational Behavior and Human Decision Processes, Elsevier, vol. 95(1), pages 40-65, September.
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    More about this item

    Keywords

    expected utility theory; cumulative prospect theory; decision making under risk; economic experiments; weighting function; value function; rank-dependent decision making; reference-dependent decision making;
    All these keywords.

    JEL classification:

    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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