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A language for the construction of preferences under uncertainty

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Author Info
Marco LiCalzi (University of Venice, Italy)

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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.

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File URL: http://129.3.20.41/eps/game/papers/0509/0509002.pdf
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Publisher Info
Paper provided by EconWPA in its series Game Theory and Information with number 0509002.

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Length: 21 pages
Date of creation: 05 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpga:0509002

Note: Type of Document - pdf; pages: 21. 25 pages, pdf
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Web page: http://129.3.20.41

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Related research
Keywords: expected utility; prospect theory; target-based decisions; choice anomalies; benchmarking;

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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Shafir, Eldar & Diamond, Peter & Tversky, Amos, 1997. "Money Illusion," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 341-74, May.
  2. Manski, C.F., 1988. "Ordinal Utility Models Of Decision Making Under Uncertainty," Working papers 363, Wisconsin Madison - Social Systems.
  3. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March. [Downloadable!] (restricted)
  4. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January. [Downloadable!] (restricted)
  5. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May. [Downloadable!] (restricted)
  6. Robert Bordley & Marco LiCalzi, 2000. "Decision analysis using targets instead of utility functions," Decisions in Economics and Finance, Springer, vol. 23(1), pages 53-74. [Downloadable!] (restricted)
  7. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  8. 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.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. Erio Castagnoli & Marco LiCalzi, 2005. "Expected utility without utility," Game Theory and Information 0508004, EconWPA. [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sergiy Gerasymchuk, 2007. "Mean-Variance Portfolio Selection with Reference Dependent Preferences," Working Papers 150, Department of Applied Mathematics, University of Venice. [Downloadable!]
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