Decision Utility Theory: Back to von Neumann, Morgenstern, and Markowitz
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.
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- 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.
- Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
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"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
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- Kahneman, Daniel & Wakker, Peter P & Sarin, Rakesh, 1997. "Back to Bentham? Explorations of Experienced Utility," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 375-405, May.
- 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.
- 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.
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