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Optimism and Pessimism with Expected Utility

Author

Listed:
  • David Dillenberger

    (Dept. of Economics, University of Pennsylvania)

  • Andrew Postlewaite

    (Dept. of Economics, University of Pennsylvania)

  • Kareen Rozen

    (Cowles Foundation, Yale University)

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.

Suggested Citation

  • David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility," Cowles Foundation Discussion Papers 1829, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1829
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    References listed on IDEAS

    as
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    Citations

    Blog mentions

    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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    2. Miettinen, Topi & Kosfeld, Michael & Fehr, Ernst & Weibull, Jörgen, 2020. "Revealed preferences in a sequential prisoners’ dilemma: A horse-race between six utility functions," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 1-25.
    3. Gorno, Leandro & Natenzon, Paulo, 2018. "Subjective ambiguity and preference for flexibility," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 24-32.
    4. Kai Barron, 2021. "Belief updating: does the ‘good-news, bad-news’ asymmetry extend to purely financial domains?," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 31-58, March.
    5. Herold, Florian & Netzer, Nick, 2023. "Second-best probability weighting," Games and Economic Behavior, Elsevier, vol. 138(C), pages 112-125.
    6. Weinstock, Eyal & Sonsino, Doron, 2014. "Are risk-seekers more optimistic? Non-parametric approach," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 236-251.
    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

    Keywords

    Subjective expected utility; Optimism; Pessimism; Stake-dependent probability;
    All these keywords.

    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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