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

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  • Philip R. P. Coelho

    ()
    (Department of Economics, Ball State University)

  • James E. McClure

    ()
    (Department of Economics, Ball State University)

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://econfac.iweb.bsu.edu/research/workingpapers/bsuecwp199602coelho.pdf
File Function: First version, 1996
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Bibliographic Info

Paper provided by Ball State University, Department of Economics in its series Working Papers with number 199602.

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

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Cited by:
  1. Rick Harbaugh & Tatiana Kornienko, 2000. "Local Status and Prospect Theory," Claremont Colleges Working Papers 2000-38, Claremont Colleges.
  2. Hayakawa, Hiroaki, 2000. "Bounded rationality, social and cultural norms, and interdependence via reference groups," Journal of Economic Behavior & Organization, Elsevier, vol. 43(1), pages 1-34, September.

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