Optimism and Pessimism with Expected Utility
AbstractSavage (1954) provided a set of axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that in addition to this representation, there is a continuum of other .expected utility.representations in which for any act, the probability distribution over states depends on the corresponding outcomes. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations; e.g., for a pessimist, the probability of every outcome except the worst is distorted down from the Savage probability. Extending the DM.s preferences to be defined on both subjective acts and objective lotteries, we show how one may distinguish optimists from pessimists and separate attitude towards uncertainty from curvature of the utility function over monetary prizes.
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Date of creation: 09 Jan 2012
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Other versions of this item:
- David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility," Cowles Foundation Discussion Papers 1829, Cowles Foundation for Research in Economics, Yale University.
- David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility," PIER Working Paper Archive 11-036, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 25 Oct 2011.
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-MIC-2012-01-18 (Microeconomics)
- NEP-UPT-2012-01-18 (Utility Models & Prospect Theory)
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- Simon Grant & Edi Karni, 2005.
"Why Does It Matter That Beliefs And Valuations Be Correctly Represented?,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 917-934, 08.
- Grant, Simon & Karni, Edi, 2003. "Why Does It Matter That Beliefs and Valuations Be Correctly Represented?," Working Papers 2003-02, Rice University, Department of Economics.
- Grant, S. & Karni, E., 2002. "Why Does it Matter that Beliefs and Valuations be Correctly Represented?," Discussion Paper 2002-12, Tilburg University, Center for Economic Research.
- Simon Grant & Benjamin Polak & Tomasz Strzalecki, 2009. "Second-Order Expected Utility," Working Paper 8340, Harvard University OpenScholar.
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