In this note, we consider a perennial problem in single-person choice theory, that is, characterizing choice under uncertainty. In particular, we consider a hypothesis put forward by Joseph Stiglitz (2005), suggesting that median-maximing behavior may be optimal under certain circumstances, and consider how it might best be rationalized within choice theory as it is currently conceived. As is well known, median-maximizing behavior is not generally optimal in the classical VNM framework. Our main result is that it is possible to rationalize the Stiglitz hypothesis in the Machina-Schmeidler (1992) framework of probabilistic sophistication.
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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number
08-09.
Length: 6 pages Date of creation: 03 Nov 2008 Date of revision: Publication status: Published: Carleton Economic Paper Handle: RePEc:car:carecp:08-09
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Find related papers by JEL classification: D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
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