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The Shape of Utility Functions and Organizational Behavior

  • Joost M. E. Pennings

    ()

    (University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics, Marketing/Decision Sciences Group, 1301 West Gregory Drive, Urbana, Illinois 61801)

  • Ale Smidts

    ()

    (Wageningen University, Department of Social Sciences, Marketing and Consumer Behavior Group, Hollandseweg 1, 6706 KN Wageningen, The Netherlands, and Rotterdam School of Management, Erasmus University Rotterdam, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands)

Based on measurements among 332 owner-managers, we investigate how the global shape of the utility function (i.e., S-shaped versus concave or convex over the total range of outcomes) relates to choice behavior. We find that the global shape of the utility function differs across decision makers (about one-third of the owner-managers exhibit an S-shaped utility function) and that the global shape is linked to organizational behavior (i.e., the production system employed), a result that does not change when using different methods to identify the decision maker's global shape of the utility function. The decision maker's risk attitude (risk averse or risk seeking) does not affect the choice of the production system. Whereas the degree of risk aversion, based on the local shape of the utility function, may be important in explaining owner-managers' trading behavior (Pennings and Smidts 2000), more structural organizational behavior appears to be linked to the global shape of the utility function.

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File URL: http://dx.doi.org/10.1287/mnsc.49.9.1251.16566
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 49 (2003)
Issue (Month): 9 (September)
Pages: 1251-1263

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Handle: RePEc:inm:ormnsc:v:49:y:2003:i:9:p:1251-1263
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