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Normative target-based decision making

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Author Info

  • Ali E. Abbas

    (School of Engineering, University of Illinois at Urbana-Champaign, Urbana, IL 61801, USA)

  • James E. Matheson

    (SmartOrg, Inc., 855 Oak Grove Avenue, Suite 202, Menlo Park, CA 94025, USA)

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    Abstract

    This paper relates normative expected-utility decision making to target-based decision making, and introduces a new quantity, the aspiration equivalent. We show that using the aspiration equivalent as a target provides a new method for choosing between lotteries that is consistent with expected-utility maximization. Furthermore, we show that the aspiration-equivalent target provides a win-win situation for executive-manager delegation. This result furnishes a new link between normative decision analysis and target-based decision making. Copyright © 2005 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/mde.1234
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 26 (2005)
    Issue (Month): 6 ()
    Pages: 373-385

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    Handle: RePEc:wly:mgtdec:v:26:y:2005:i:6:p:373-385

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    2. Robert Bordley & Marco LiCalzi, 2000. "Decision analysis using targets instead of utility functions," Decisions in Economics and Finance, Springer, vol. 23(1), pages 53-74.
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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. Chernonog, Tatyana & Avinadav, Tal, 2014. "Profit criteria involving risk in price setting of virtual products," European Journal of Operational Research, Elsevier, vol. 236(1), pages 351-360.

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