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Social context and the utility of wealth: Addressing the Markowitz challenge

Author

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  • Philip R. P. Coelho

    () (Department of Economics, Ball State University)

  • James E. McClure

    () (Department of Economics, Ball State University)

Abstract

The expected utility hypothesis has a long successful tradition in economics. However, behavioral anomalies confound it when utility depends solely on the absolute level of wealth. Harry Markowitz (1952) suggested that the anomalies might be resolved if utility could be augmented to endogenize the taste for wealth in a non-tautological manner. This paper addresses Markowitz’s challenge. We augment the Markowitz utility function with arguments that have roots in the theory of natural selection: peer wealth, and status. Our specification yields testable implications about gambling, insuring and peer selection, and yields an explanation of the Allais paradox.

Suggested Citation

  • Philip R. P. Coelho & James E. McClure, 1996. "Social context and the utility of wealth: Addressing the Markowitz challenge," Working Papers 199602, Ball State University, Department of Economics, revised Jan 1998.
  • Handle: RePEc:bsu:wpaper:199602
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    References listed on IDEAS

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    Cited by:

    1. Hayakawa, Hiroaki, 2000. "Bounded rationality, social and cultural norms, and interdependence via reference groups," Journal of Economic Behavior & Organization, Elsevier, vol. 43(1), pages 1-34, September.
    2. Rick Harbaugh & Tatiana Kornienko, 2000. "Local Status and Prospect Theory," Claremont Colleges Working Papers 2000-38, Claremont Colleges.

    More about this item

    Keywords

    Expected utility; Non-expected utility; risk; natural selection; sociobiology; reciprocal altruism; status; gambling; risk; insurance; Allais paradox;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • D00 - Microeconomics - - General - - - General

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