Optimism and Pessimism with Expected Utility
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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- Grant, Simon & Karni, Edi, 2003.
"Why Does It Matter That Beliefs and Valuations Be Correctly Represented?,"
2003-02, Rice University, Department of Economics.
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- Grant, S. & Karni, E., 2002. "Why Does it Matter that Beliefs and Valuations be Correctly Represented?," Discussion Paper 2002-12, Tilburg University, Center for Economic Research.
- Simon Grant & Ben Polak & Tomasz Strzalecki, 2010. "Second-Order Expected Utility," Working Paper 8340, Harvard University OpenScholar.
- Barton L. Lipman & Eddie Dekel, 2010.
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Boston University - Department of Economics - Working Papers Series
WP2010-020, Boston University - Department of Economics.
- Eddie Dekel & Barton L. Lipman, 2009.
"How (Not) to Do Decision Theory,"
Levine's Working Paper Archive
814577000000000339, David K. Levine.
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