IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/27141.html
   My bibliography  Save this paper

Decision Utility Theory: Back to von Neumann, Morgenstern, and Markowitz

Author

Listed:
  • Kontek, Krzysztof

Abstract

Prospect Theory (1979) and its Cumulative version (1992) argue for probability weighting to explain lottery choices. Decision Utility Theory presents an alternative solution, which makes no use of this concept. The new theory distinguishes decision and perception utility, postulates a double S-shaped decision utility curve similar to one hypothesized by Markowitz (1952), and applies the expected decision utility value similarly to the theory by von Neumann and Morgenstern (1944). Decision Utility Theory proposes straightforward risk measures, presents a simple explanation of risk attitudes by using the aspiration level concept, and predicts that people might not consider probabilities and outcomes jointly, on the contrary to the expected utility paradigm.

Suggested Citation

  • Kontek, Krzysztof, 2010. "Decision Utility Theory: Back to von Neumann, Morgenstern, and Markowitz," MPRA Paper 27141, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27141
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/27141/1/MPRA_paper_27141.pdf
    File Function: original version
    Download Restriction: no

    References listed on IDEAS

    as
    1. Bernard M.S. van Praag & Paul Frijters, 1999. "The measurement of welfare and well-being; the Leyden approach," School of Economics and Finance Discussion Papers and Working Papers Series 071a, School of Economics and Finance, Queensland University of Technology.
    2. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151-151.
    4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    5. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 221-234, Winter.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Krzysztof Piasecki, 2012. "The basis of financial arithmetic from the viewpoint of utility theory," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 3, pages 37-53.
    2. Krzysztof M. Piasecki, 2011. "Effectiveness of securities with fuzzy probabilistic return," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 2, pages 65-78.
    3. repec:wut:journl:v:3:y:2012:id:1044 is not listed on IDEAS
    4. Kontek, Krzysztof, 2010. "Linking Decision and Time Utilities," MPRA Paper 27541, University Library of Munich, Germany.
    5. Krzysztof Piasecki, 2013. "Basis of financial arithmetic from the viewpoint of the utility theory," Papers 1302.0537, arXiv.org.

    More about this item

    Keywords

    Expected Utility Theory; Markowitz Hypothesis; Prospect Theory; Decision Utility; Allais Paradox; Common Ratio Effect; Risk Attitude Measures; Aspiration Level.;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:27141. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.