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Optimism and Pessimism with Expected Utility

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Author Info

  • David Dillenberger

    ()
    (Department of Economics, University of Pennsylvania)

  • Andrew Postlewaite

    ()
    (Department of Economics, University of Pennsylvania)

  • Kareen Rozen

    ()
    (Department of Economics, Yale University)

Abstract

Savage (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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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-036.

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Length: 20 pages
Date of creation: 01 Aug 2011
Date of revision: 25 Oct 2011
Handle: RePEc:pen:papers:11-036

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Keywords: Subjective expected utility; optimism; pessimism; stake-dependent probability;

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  1. Simon Grant & Ben Polak & Tomasz Strzalecki, 1969. "Second-Order Expected Utility," Working Paper 8340, Harvard University OpenScholar.
  2. 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.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Measuring optimists and pessimists
    by Economic Logician in Economic Logic on 2011-12-16 15:56:00

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