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Expected utility versus the changes in knowledge ahead

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  • Pope, Robin
  • Leitner, Johannes
  • Leopold-Wildburger, Ulrike

Abstract

We present a decision theory appropriate for use in serious choices such as insurance. It extends standard decision theories like expected utility or cumulative prospect theory which are atemporal single stage theories. Instead it employs stages of knowledge ahead to track satisfactions and dissatisfactions. In the first stage of the risk, the uninsured face dissatisfactions of worries and planning difficulties (avoided by the insured), also perhaps positive satisfactions of thrills (missed out by the insured). In the second stage when the risk is past, the uninsured may face the dissatisfactions of ridicule and blame if they learn that they were unlucky. From experimental and questionnaire data, 80% of our subjects are influenced by such secondary satisfactions. Only five percent of our participants employ the usage of integrated quantitative aggregation rules for evaluating acts as assumed under expected utility theory.

Suggested Citation

  • Pope, Robin & Leitner, Johannes & Leopold-Wildburger, Ulrike, 2009. "Expected utility versus the changes in knowledge ahead," European Journal of Operational Research, Elsevier, vol. 199(3), pages 892-901, December.
  • Handle: RePEc:eee:ejores:v:199:y:2009:i:3:p:892-901
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hofer, Vera & Leitner, Johannes, 2011. "Should European gamblers play lotto in the USA?," European Journal of Operational Research, Elsevier, vol. 215(1), pages 181-187, November.
    2. Robin Pope & Reinhard Selten & Sebastian Kube & Jürgen von Hagen, 2009. "Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency," Bonn Econ Discussion Papers bgse26_2009, University of Bonn, Germany.
    3. Robin Pope & Reinhard Selten, 2009. "Risk in a Simple Temporal Framework for Expected Utility Theory and for SKAT, the Stages of Knowledge Ahead Theory," Bonn Econ Discussion Papers bgse27_2009, University of Bonn, Germany.
    4. Robin Pope & Reinhard Selten & Johannes Kaiser & Sebastian Kube & Jürgen Hagen, 2012. "Exchange rate determination: a theory of the decisive role of central bank cooperation and conflict," International Economics and Economic Policy, Springer, vol. 9(1), pages 13-51, March.
    5. Pugno, Maurizio, 2014. "Scitovsky, behavioural economics, and beyond," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-29.
    6. Robin Pope, 2009. "Risk Starvation Contributes to Dementias and Depressions: Whiffs of Danger Are the Antidote," Bonn Econ Discussion Papers bgse9_2009, University of Bonn, Germany.

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