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Social context and the utility of wealth: Addressing the Markowitz challenge

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Author Info
Philip R. P. Coelho () (Department of Economics, Ball State University)
James E. McClure () (Department of Economics, Ball State University)

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Abstract

The expected utility hypothesis has a long successful tradition in economics. However, behavioral anomalies confound it when utility depends solely on the absolute level of wealth. Harry Markowitz (1952) suggested that the anomalies might be resolved if utility could be augmented to endogenize the taste for wealth in a non-tautological manner. This paper addresses Markowitz’s challenge. We augment the Markowitz utility function with arguments that have roots in the theory of natural selection: peer wealth, and status. Our specification yields testable implications about gambling, insuring and peer selection, and yields an explanation of the Allais paradox.

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File URL: http://web.bsu.edu/cob/econ/research/papers/bsuecwp199602coelho.pdf
File Format: application/pdf
File Function: First version, 1996
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Publisher Info
Paper provided by Ball State University, Department of Economics in its series Working Papers with number 199602.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 19 pages
Date of creation: Feb 1996
Date of revision: Jan 1998
Publication status: Published in Journal of Economic Behavior and Organization 37 (1998):305-314.
Handle: RePEc:bsu:wpaper:199602

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Related research
Keywords: Expected utility; Non-expected utility; risk; natural selection; sociobiology; reciprocal altruism; status; gambling; risk; insurance; Allais paradox;

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D64 - Microeconomics - - Welfare Economics - - - Altruism
D00 - Microeconomics - - General - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  2. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Safra, Zvi & Segal, Uzi & Spivak, Avia, 1990. "Preference Reversal and Nonexpected Utility Behavior," American Economic Review, American Economic Association, vol. 80(4), pages 923-30, September.
  4. Fishburn, Peter C., 1983. "Transitive measurable utility," Journal of Economic Theory, Elsevier, vol. 31(2), pages 293-317, December. [Downloadable!] (restricted)
  5. Fershtman, Chaim & Weiss, Yoram, 1993. "Social Status, Culture and Economic Performance," Economic Journal, Royal Economic Society, vol. 103(419), pages 946-59, July. [Downloadable!] (restricted)
    Other versions:
  6. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November. [Downloadable!] (restricted)
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    Other versions:
  9. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March. [Downloadable!] (restricted)
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    Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rick Harbaugh & Tatiana Kornienko, 2000. "Local Status and Prospect Theory," Claremont Colleges Working Papers 2000-38, Claremont Colleges. [Downloadable!]
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