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Optimism and Pessimism with Expected Utility

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  • David Dillenberger
  • Andrew Postlewaite
  • Kareen Rozen

Abstract

Savage (1954) provided a set of axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that in addition to this representation, there is a continuum of other "expected utility" representations in which for any act, the probability distribution over states depends on the corresponding outcomes. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations; e.g., for a pessimist, the probability of every outcome except the worst is distorted down from the Savage probability. Extending the DM's preferences to be defined on both subjective acts and objective lotteries, we show how one may distinguish optimists from pessimists and separate attitude towards uncertainty from curvature of the utility function over monetary prizes.
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  • David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2012. "Optimism and Pessimism with Expected Utility," Levine's Working Paper Archive 786969000000000353, David K. Levine.
    • Handle: RePEc:cla:levarc:786969000000000353
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Measuring optimists and pessimists
      by Economic Logician in Economic Logic on 2011-12-16 21:56:00

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    Cited by:

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    4. Barron, Kai, 2021. "Belief updating: does the 'good-news, bad-news' asymmetry extend to purely financial domains?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 24(1), pages 31-58.
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    7. Paola Manzini & Marco Mariotti, 2015. "Modelling Imperfect Attention," Working Papers 744, Queen Mary University of London, School of Economics and Finance.
    8. Paola Manzini & Marco Mariotti, 2015. "Modelling Imperfect Attention," Working Papers 744, Queen Mary University of London, School of Economics and Finance.

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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