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Are CEOs Expected Utility Maximizers?

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  • John List
  • Charles Mason

Abstract

Are individuals expected utility maximizers? This question represents much more than academic curiosity. In a normative sense, at stake are the fundamental underpinnings of the bulk of the last half-century’s models of choice under uncertainty. From a positive perspective, the ubiquitous use of benefit-cost analysis across government agencies renders the expected utility maximization paradigm literally the only game in town. In this study, we advance the literature by exploring CEO’s preferences over small probability, high loss lotteries. Using undergraduate students as our experimental control group, we find that both our CEO and student subject pools exhibit frequent and large departures from expected utility theory. In addition, as the extreme payoffs become more likely CEOs exhibit greater aversion to risk. Our results suggest that use of the expected utility paradigm in decision making substantially underestimates society’s willingness to pay to reduce risk in small probability, high loss events.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15453.

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Date of creation: Oct 2009
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Publication status: published as List, John A. & Mason, Charles F., 2011. "Are CEOs expected utility maximizers?," Journal of Econometrics, Elsevier, vol. 162(1), pages 114-123, May.
Handle: RePEc:nbr:nberwo:15453

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  14. Graciela Chichilnisky & Geoffrey Heal, 1993. "Global Environmental Risks," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(4), pages 65-86, Fall.
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Cited by:
  1. List, John A. & Mason, Charles F., 2011. "Are CEOs expected utility maximizers?," Journal of Econometrics, Elsevier, Elsevier, vol. 162(1), pages 114-123, May.
  2. John A. List, 2014. "Using Field Experiments to Change the Template of How We Teach Economics," The Journal of Economic Education, Taylor & Francis Journals, Taylor & Francis Journals, vol. 45(2), pages 81-89, June.
  3. Jeffery Flory & Uri Gneezy & Kenneth Leonard & John List, 2012. "Sex, competitiveness, and investment in offspring: On the origin of preferences," Artefactual Field Experiments, The Field Experiments Website 00072, The Field Experiments Website.
  4. Luca Corazzini & Stefano Galavotti & Rupert Sausgruber & Paola Valbonesi, 2012. "Allotment In First-Price Auctions: An Experimental Investigation," "Marco Fanno" Working Papers, Dipartimento di Scienze Economiche "Marco Fanno" 0153, Dipartimento di Scienze Economiche "Marco Fanno".
  5. Lefebvre, Mathieu & Vieider, Ferdinand M., 2011. "Risk Taking of Executives under Different Incentive Contracts: Experimental Evidence," Discussion Papers in Economics, University of Munich, Department of Economics 12210, University of Munich, Department of Economics.

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