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Are CEOs Expected Utility Maximizers?

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Author Info
John List
Charles Mason

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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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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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Handle: RePEc:nbr:nberwo:15453

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Find related papers by JEL classification:
C9 - Mathematical and Quantitative Methods - - Design of Experiments
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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This page was last updated on 2009-11-25.

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