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Can Median-Maximizing Behavior Be Rational?

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Abstract

In this note, we consider a perennial problem in single-person choice theory, that is, characterizing choice under uncertainty. In particular, we consider a hypothesis put forward by Joseph Stiglitz (2005), suggesting that median-maximing behavior may be optimal under certain circumstances, and consider how it might best be rationalized within choice theory as it is currently conceived. As is well known, median-maximizing behavior is not generally optimal in the classical VNM framework. Our main result is that it is possible to rationalize the Stiglitz hypothesis in the Machina-Schmeidler (1992) framework of probabilistic sophistication.

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  • Vivek Dehejia & Jiankang Zhang, 2008. "Can Median-Maximizing Behavior Be Rational?," Carleton Economic Papers 08-09, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:08-09
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    1. Vivek Dehejia, 2008. "Risk Aversion, Stochastic Dominance, and Rules of Thumb: Concept and Application," Carleton Economic Papers 08-01, Carleton University, Department of Economics.
    2. Vivek Dehejia & Marcel Voia, 2008. "International Income Comparisons and Location Choice: Methodology, Analysis, and Implications," Carleton Economic Papers 08-02, Carleton University, Department of Economics.
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    1. Vivek Dehejia & Marcel Voia, 2008. "International Income Comparisons and Location Choice: Methodology, Analysis, and Implications," Carleton Economic Papers 08-02, Carleton University, Department of Economics.
    2. Dehejia Vivek H. & Voia Marcel C., 2012. "International Income Comparisons and Social Welfare: Methodology, Analysis, and Implications," Journal of Globalization and Development, De Gruyter, vol. 3(1), pages 1-24, June.

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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