IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Accounting for optimism and pessimism in expected utility

  • Webb, Craig S.
  • Zank, Horst

We provide a preference foundation for decision under risk resulting in a model where probability weighting is linear as long as the corresponding probabilities are not extreme (i.e., 0 or 1). This way, most of the elegance and mathematical tractability of expected utility is maintained and also much of its normative foundation. Yet, the new model can accommodate the extreme sensitivity towards changes from 0 to almost impossible and from almost certain to 1 that has widely been documented in the experimental literature. The model can be viewed as “expected utility with the best and worst in mind” as suggested by Chateauneuf, Eichberger and Grant (Chateauneuf, Alain, Eichberger, Jürgen, Grant, Simon, 2007. Choice under uncertainty with the best and worst in mind: NEO-Additive capacities. Journal of Economic Theory 137, 538–567) or, following our preference foundation, interpreted as “expected utility with consistent optimism and pessimism”.

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.

File URL: http://www.sciencedirect.com/science/article/pii/S0304406811000887
Download Restriction: Full text for ScienceDirect subscribers only

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.

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 47 (2011)
Issue (Month): 6 ()
Pages: 706-717

as
in new window

Handle: RePEc:eee:mateco:v:47:y:2011:i:6:p:706-717
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

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.:

as in new window
  1. Mohammed Abdellaoui & Olivier L’Haridon & Horst Zank, 2010. "Separating curvature and elevation: A parametric probability weighting function," Journal of Risk and Uncertainty, Springer, vol. 41(1), pages 39-65, August.
  2. Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
  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. 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.
  5. Abdellaoui, Mohammed & Vossman, Frank & Weber, Martin, 2003. "Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty," CEPR Discussion Papers 3756, C.E.P.R. Discussion Papers.
  6. Wakker, Peter P, 2001. "Testing and Characterizing Properties of Nonadditive Measures through Violations of the Sure-Thing Principle," Econometrica, Econometric Society, vol. 69(4), pages 1039-59, July.
  7. Wakker, Peter, 1993. "Additive representations on rank-ordered sets : II. The topological approach," Journal of Mathematical Economics, Elsevier, vol. 22(1), pages 1-26.
  8. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  9. Peter Wakker & Daniel Deneffe, 1996. "Eliciting von Neumann-Morgenstern Utilities When Probabilities Are Distorted or Unknown," Management Science, INFORMS, vol. 42(8), pages 1131-1150, August.
  10. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  11. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-68, December.
  12. Mohammed Abdellaoui & Olivier l’Haridon & Horst Zank, 2009. "Separating Curvature and Elevation: A Parametric Weighting Function," The School of Economics Discussion Paper Series 0901, Economics, The University of Manchester.
  13. Chateauneuf, Alain, 1999. "Comonotonicity axioms and rank-dependent expected utility theory for arbitrary consequences," Journal of Mathematical Economics, Elsevier, vol. 32(1), pages 21-45, August.
  14. Grant, Simon & Chateauneuf, A. & Eichberger, J., 2002. "Choice under Uncertainty with the Best and Worst in Mind: Neo-additive Capacities," Working Papers 2002-10, Rice University, Department of Economics.
  15. Zank, Horst & Schmidt, Ulrich & Diecidue, Enrico, 2007. "Parametric Weighting Functions," Economics Working Papers 2007,01, Christian-Albrechts-University of Kiel, Department of Economics.
  16. Camerer, Colin F, 1989. " An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
  17. Chateauneuf, Alain & Wakker, Peter, 1993. "From local to global additive representation," Journal of Mathematical Economics, Elsevier, vol. 22(6), pages 523-545.
  18. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  19. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  20. Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
  21. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
  22. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  23. Michael Kilka & Martin Weber, 2001. "What Determines the Shape of the Probability Weighting Function Under Uncertainty?," Management Science, INFORMS, vol. 47(12), pages 1712-1726, December.
  24. Horst Zank, 2010. "Consistent probability attitudes," Economic Theory, Springer, vol. 44(2), pages 167-185, August.
  25. Enrico Diecidue & Jeroen van de Ven, 2008. "Aspiration Level, Probability Of Success And Failure, And Expected Utility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 683-700, 05.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:47:y:2011:i:6:p:706-717. 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: (Zhang, Lei)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.