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Decision Utility Theory: Back to von Neumann, Morgenstern, and Markowitz

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  • Kontek, Krzysztof

Abstract

Prospect Theory (1979) and its Cumulative version (1992) argue for probability weighting to explain lottery choices. Decision Utility Theory presents an alternative solution, which makes no use of this concept. The new theory distinguishes decision and perception utility, postulates a double S-shaped decision utility curve similar to one hypothesized by Markowitz (1952), and applies the expected decision utility value similarly to the theory by von Neumann and Morgenstern (1944). Decision Utility Theory proposes straightforward risk measures, presents a simple explanation of risk attitudes by using the aspiration level concept, and predicts that people might not consider probabilities and outcomes jointly, on the contrary to the expected utility paradigm.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27141.

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Date of creation: 01 Dec 2010
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Handle: RePEc:pra:mprapa:27141

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Related research

Keywords: Expected Utility Theory; Markowitz Hypothesis; Prospect Theory; Decision Utility; Allais Paradox; Common Ratio Effect; Risk Attitude Measures; Aspiration Level.;

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  1. 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.
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  3. Kahneman, Daniel & Wakker, Peter P & Sarin, Rakesh, 1997. "Back to Bentham? Explorations of Experienced Utility," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 375-405, May.
  4. Bernard M.S. van Praag & Paul Frijters, 1999. "The measurement of welfare and well-being; the Leyden approach," School of Economics and Finance Discussion Papers and Working Papers Series 071a, School of Economics and Finance, Queensland University of Technology.
  5. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 221-234, Winter.
  6. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
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Cited by:
  1. Krzysztof Piasecki, 2013. "Basis of financial arithmetic from the viewpoint of the utility theory," Papers 1302.0537, arXiv.org.
  2. repec:wut:journl:v:3:y:2012:id:1044 is not listed on IDEAS
  3. Krzysztof M. Piasecki, 2011. "Effectiveness of securities with fuzzy probabilistic return," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 2, pages 65-78.
  4. Kontek, Krzysztof, 2010. "Linking Decision and Time Utilities," MPRA Paper 27541, University Library of Munich, Germany.
  5. Krzysztof Piasecki, 2012. "The basis of financial arithmetic from the viewpoint of utility theory," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 3, pages 37-53.

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