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Optimism and Pessimism with Expected Utility

  • David Dillenberger


    (Department of Economics, University of Pennsylvania)

  • Andrew Postlewaite


    (Department of Economics, University of Pennsylvania)

  • Kareen Rozen


    (Department of Economics, Yale University)

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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Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 11-036.

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Length: 20 pages
Date of creation: 01 Aug 2011
Date of revision: 25 Oct 2011
Handle: RePEc:pen:papers:11-036
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  1. Grant, Simon & Karni, Edi, 2003. "Why Does It Matter That Beliefs and Valuations Be Correctly Represented?," Working Papers 2003-02, Rice University, Department of Economics.
  2. Itzhak Gilboa & Andrew Postlewaite & David Schmeidler, 2009. "Is It Always Rational to Satisfy Savage's Axioms?," Post-Print hal-00493170, HAL.
  3. Eddie Dekel & Barton L. Lipman, 2009. "How (Not) to Do Decision Theory," Levine's Working Paper Archive 814577000000000339, David K. Levine.
  4. Simon Grant & Ben Polak & Tomasz Strzalecki, 2010. "Second-Order Expected Utility," Working Paper 8340, Harvard University OpenScholar.
  5. Barton L. Lipman & Eddie Dekel, 2010. "Costly Self Control and Random Self Indulgence," Boston University - Department of Economics - Working Papers Series WP2010-020, Boston University - Department of Economics.
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