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Ausi Expected Utility : An Anticipated Utility Theory of Relative Disappointment Aversion

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  • GRANT, Simon

    (Australian National University)

  • KAJII, Atsushi

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

Abstract

In recent years there has been a growing theoretical, experimental and empirical challenge to Expected Utility Theory, the overwhelmingly dominant paradigm for modeling decision-making under risk. However, there has been relatively little work done in providing easily parameterized alternatives for applied work. In this paper we provide an axiomatization for a representation of preferences over lotteries that is only one parameter richer than expected utility. Our model is a special case of Quiggin's Rank Dependent Expected Utility. Moreover, we show that the same restriction on this parameter is required for: risk aversion; intuitive comparative static results for a reasonably general class of economically interesting choice problems; and accommodating some of the most well-known violations of Expected Utility Theory.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1994045.

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Date of creation: 01 Oct 1994
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Handle: RePEc:cor:louvco:1994045

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  1. Loomes, Graham, 1991. " Evidence of a New Violation of the Independence Axiom," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 91-108, January.
  2. Feder, Gershon, 1977. "The impact of uncertainty in a class of objective functions," Journal of Economic Theory, Elsevier, vol. 16(2), pages 504-512, December.
  3. Diamond, Peter A. & Stiglitz, Joseph E., 1974. "Increases in risk and in risk aversion," Journal of Economic Theory, Elsevier, vol. 8(3), pages 337-360, July.
  4. Luce, R Duncan & Fishburn, Peter C, 1991. " Rank- and Sign-Dependent Linear Utility Models for Finite First-Order Gambles," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 29-59, January.
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  6. Segal, Uzi, 1993. " The Measure Representation: A Correction," Journal of Risk and Uncertainty, Springer, vol. 6(1), pages 99-107, January.
  7. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  8. Uzi Segal, 1986. "Some Remarks on Quiggin's Anticipated Utility," UCLA Economics Working Papers 392, UCLA Department of Economics.
  9. Chew, S. H. & Epstein, L. G., 1989. "A unifying approach to axiomatic non-expected utility theories," Journal of Economic Theory, Elsevier, vol. 49(2), pages 207-240, December.
  10. Starmer, Chris, 1992. "Testing New Theories of Choice under Uncertainty Using the Common Consequence Effect," Review of Economic Studies, Wiley Blackwell, vol. 59(4), pages 813-30, October.
  11. Uzi Segal, 2000. "Two Stage Lotteries Without the Reduction Axiom," Levine's Working Paper Archive 7599, David K. Levine.
  12. Quiggin, John, 1991. "On the Optimal Design of Lotteries," Economica, London School of Economics and Political Science, vol. 58(229), pages 1-16, February.
  13. Wu, George, 1994. "An Empirical Test of Ordinal Independence," Journal of Risk and Uncertainty, Springer, vol. 9(1), pages 39-60, July.
  14. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
  15. Camerer, Colin F, 1989. " An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
  16. Hong Chew Soo & Epstein Larry G. & Wakker Peter, 1993. "A Unifying Approach to Axiomatic Non-expected Utility Theories: Correction and Comment," Journal of Economic Theory, Elsevier, vol. 59(1), pages 183-188, February.
  17. Puppe, Clemens, 1990. "Preference functionals with prize-dependent distortion of probabilities," Economics Letters, Elsevier, vol. 33(2), pages 127-131, June.
  18. Rubinstein, Ariel, 1988. "Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?)," Journal of Economic Theory, Elsevier, vol. 46(1), pages 145-153, October.
  19. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  20. 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.
  21. Wakker, Peter, 1993. " Counterexamples to Segal's Measure Representation Theorem," Journal of Risk and Uncertainty, Springer, vol. 6(1), pages 91-98, January.
  22. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
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Cited by:
  1. Carlos Laciana & Elke Weber, 2008. "Correcting expected utility for comparisons between alternative outcomes: A unified parameterization of regret and disappointment," Journal of Risk and Uncertainty, Springer, vol. 36(1), pages 1-17, February.
  2. Thierry Chauveau, 2012. "Subjective risk and disappointment," Documents de travail du Centre d'Economie de la Sorbonne 12063, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  3. Abdellaoui, Mohammed & Bleichrodt, Han, 2007. "Eliciting Gul's theory of disappointment aversion by the tradeoff method," Journal of Economic Psychology, Elsevier, vol. 28(6), pages 631-645, December.
  4. Ryan, Matthew J., 2006. "Risk aversion in RDEU," Journal of Mathematical Economics, Elsevier, vol. 42(6), pages 675-697, September.
  5. Kfir Eliaz & Debraj Ray & Ronny Razin, 2006. "Choice Shifts in Groups: A Decision-Theoretic Basis," American Economic Review, American Economic Association, vol. 96(4), pages 1321-1332, September.
  6. Grant, Simon & Kajii, Atsushi & Polak, Ben, 2001. "Different notions of disappointment aversion," Economics Letters, Elsevier, vol. 70(2), pages 203-208, February.
  7. Kfir Eliaz & Debraj Ray, 2004. "Choice Shifts in Groups," Econometric Society 2004 North American Summer Meetings 205, Econometric Society.
  8. Thierry Chauveau, 2012. "Subjective risk and disappointment," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00747902, HAL.

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