Expected utility versus the changes in knowledge ahead
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- Edi Karni, 2005.
"Subjective Expected Utility Theory without States of the World,"
Economics Working Paper Archive
523, The Johns Hopkins University,Department of Economics.
- Karni, Edi, 2006. "Subjective expected utility theory without states of the world," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 325-342, June.
- Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
- 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.
- Selten, Reinhard & Abdolkarim Sadrieh & Klaus Abbink, 1995.
"Money does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse,"
Discussion Paper Serie B
343, University of Bonn, Germany.
- Reinhard Selten & Abdolkarim Sadrieh & Klaus Abbink, 1999. "Money Does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Theory and Decision, Springer, vol. 46(3), pages 213-252, June.
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Wulf Albers & Robin Pope & Reinhard Selten & Bodo Vogt, 1999.
"Experimental Evidence for Attractions to Chance,"
Center for Mathematical Economics Working Papers
317, Center for Mathematical Economics, Bielefeld University.
- Nobuhiro Kiyotaki & John Moore, 1995.
NBER Working Papers
5083, National Bureau of Economic Research, Inc.
- Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 69(1), pages 99-118.
- Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory and Anticipatory Feelings," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 55-79.
- Langlois, Richard N & Cosgel, Metin M, 1993. "Frank Knight on Risk, Uncertainty, and the Firm: A New Interpretation," Economic Inquiry, Western Economic Association International, vol. 31(3), pages 456-465, July.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-291, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
- Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
- Sunstein, Cass R, 2003. "Terrorism and Probability Neglect," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 121-136, March-May.
- Starmer, Chris & Sugden, Robert, 1991. "Does the Random-Lottery Incentive System Elicit True Preferences? An Experimental Investigation," American Economic Review, American Economic Association, vol. 81(4), pages 971-978, September.
- Katrin Borcherding & Thomas Eppel & Detlof von Winterfeldt, 1991. "Comparison of Weighting Judgments in Multiattribute Utility Measurement," Management Science, INFORMS, vol. 37(12), pages 1603-1619, December.
- Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-563, June.
- Harsanyi, John C, 1978. "Bayesian Decision Theory and Utilitarian Ethics," American Economic Review, American Economic Association, vol. 68(2), pages 223-228, May.
- Pope, Robin, 2004. "Biases from omitted risk effects in standard gamble utilities," Journal of Health Economics, Elsevier, vol. 23(4), pages 695-735, July.
When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:199:y:2009:i:3:p:892-901. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.