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A language for the construction of preferences under uncertainty

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  • Marco LiCalzi

    (University of Venice, Italy)

Abstract

This paper studies a target-based procedure to rank lotteries that is normatively and observationally equivalent to the expected utility model. In view of this equivalence, the traditional utility-based language for decision making may be substituted with an alternative target-based language. Switching language may have significant modelling consequences. To exemplify, we contrast the utility-based viewpoint of prospect theory against the target-based viewpoint and provide an explanation of Allais’ paradox based on context dependence instead of distorted probabilities.

Suggested Citation

  • Marco LiCalzi, 2005. "A language for the construction of preferences under uncertainty," Game Theory and Information 0509002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpga:0509002
    Note: Type of Document - pdf; pages: 21. 25 pages, pdf
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/game/papers/0509/0509002.pdf
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    References listed on IDEAS

    as
    1. Manski, Charles F., 1986. "Ordinal Utility Models Of Decision Making Under Uncertainty," SSRI Workshop Series 292682, University of Wisconsin-Madison, Social Systems Research Institute.
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    3. 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.
    4. Eldar Shafir & Peter Diamond & Amos Tversky, 1997. "Money Illusion," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 341-374.
    5. Marvin H. Berhold, 1973. "The Use of Distribution Functions to Represent Utility Functions," Management Science, INFORMS, vol. 19(7), pages 825-829, March.
    6. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    7. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    8. Erio Castagnoli & Marco LiCalzi, 2005. "Expected utility without utility," Game Theory and Information 0508004, University Library of Munich, Germany.
    9. Karl Borch, 1968. "Decision Rules Depending On The Probability Of Ruin," Oxford Economic Papers, Oxford University Press, vol. 20(1), pages 1-10.
    10. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    11. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    12. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    13. Robert Bordley & Marco LiCalzi, 2000. "Decision analysis using targets instead of utility functions," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 23(1), pages 53-74.
    14. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    15. C. West Churchman & Russell L. Ackoff, 1954. "An Approximate Measure of Value," Operations Research, INFORMS, vol. 2(2), pages 172-187, May.
    16. Marco LiCalzi, 2000. "Upper and lower bounds for expected utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(2), pages 489-502, September.
    17. 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.
    18. DellaVigna, Stefano & LiCalzi, Marco, 2001. "Learning to make risk neutral choices in a symmetric world," Mathematical Social Sciences, Elsevier, vol. 41(1), pages 19-37, January.
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    Citations

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    Cited by:

    1. Robert Bordley & Marco Licalzi & Luisa Tibiletti, 2017. "A Target-Based Foundation for the “Hard-Easy Effect” Bias," Eurasian Studies in Business and Economics, in: Mehmet Huseyin Bilgin & Hakan Danis & Ender Demir & Ugur Can (ed.), Country Experiences in Economic Development, Management and Entrepreneurship, pages 659-671, Springer.
    2. Lorenzo Bastianello & Marco LiCalzi, 2015. "Target-based solutions for Nash bargaining," Working Papers 5, Venice School of Management - Department of Management, Università Ca' Foscari Venezia.
    3. DellaVigna, Stefano & LiCalzi, Marco, 2001. "Learning to make risk neutral choices in a symmetric world," Mathematical Social Sciences, Elsevier, vol. 41(1), pages 19-37, January.
    4. Lorenzo Bastianello & Marco LiCalzi, 2019. "The Probability to Reach an Agreement as a Foundation for Axiomatic Bargaining," Econometrica, Econometric Society, vol. 87(3), pages 837-865, May.
    5. Sergiy Gerasymchuk, 2007. "Mean-Variance Portfolio Selection with Reference Dependent Preferences," Working Papers 150, Department of Applied Mathematics, Università Ca' Foscari Venezia.

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    More about this item

    Keywords

    expected utility; prospect theory; target-based decisions; choice anomalies; benchmarking;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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