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A language for the construction of preferences under uncertainty

Author

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  • Marco LiCalzi

    (University of Venice, Italy)

Abstract

This paper studies a target-based procedure to rank lotteries that is normatively and observationally equivalent to the expected utility model. In view of this equivalence, the traditional utility-based language for decision making may be substituted with an alternative target-based language. Switching language may have significant modelling consequences. To exemplify, we contrast the utility-based viewpoint of prospect theory against the target-based viewpoint and provide an explanation of Allais’ paradox based on context dependence instead of distorted probabilities.

Suggested Citation

  • Marco LiCalzi, 2005. "A language for the construction of preferences under uncertainty," Game Theory and Information 0509002, EconWPA.
  • Handle: RePEc:wpa:wuwpga:0509002 Note: Type of Document - pdf; pages: 21. 25 pages, pdf
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    File URL: http://econwpa.repec.org/eps/game/papers/0509/0509002.pdf
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    References listed on IDEAS

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    1. Manski, C.F., 1988. "Ordinal Utility Models Of Decision Making Under Uncertainty," Working papers 363, Wisconsin Madison - Social Systems.
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    3. 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.
    4. Eldar Shafir & Peter Diamond & Amos Tversky, 1997. "Money Illusion," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 341-374.
    5. Marvin H. Berhold, 1973. "The Use of Distribution Functions to Represent Utility Functions," Management Science, INFORMS, pages 825-829.
    6. Erio Castagnoli & Marco LiCalzi, 2005. "Expected utility without utility," Game Theory and Information 0508004, EconWPA.
    7. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    8. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, pages 263-291.
    10. Robert Bordley & Marco LiCalzi, 2000. "Decision analysis using targets instead of utility functions," Decisions in Economics and Finance, Springer;Associazione per la Matematica, pages 53-74.
    11. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    12. Marco LiCalzi, 2000. "Upper and lower bounds for expected utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 489-502.
    13. DellaVigna, Stefano & LiCalzi, Marco, 2001. "Learning to make risk neutral choices in a symmetric world," Mathematical Social Sciences, Elsevier, vol. 41(1), pages 19-37, January.
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    Citations

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    Cited by:

    1. Robert Bordley & Marco LiCalzi & Luisa Tibiletti, 2014. "A target-based foundation for the "hard-easy effect" bias," Working Papers 23, Department of Management, Università Ca' Foscari Venezia.
    2. Lorenzo Bastianello & Marco LiCalzi, 2015. "Target-based solutions for Nash bargaining," Working Papers 5, Department of Management, Università Ca' Foscari Venezia.
    3. DellaVigna, Stefano & LiCalzi, Marco, 2001. "Learning to make risk neutral choices in a symmetric world," Mathematical Social Sciences, Elsevier, vol. 41(1), pages 19-37, January.
    4. Sergiy Gerasymchuk, 2007. "Mean-Variance Portfolio Selection with Reference Dependent Preferences," Working Papers 150, Department of Applied Mathematics, Università Ca' Foscari Venezia.

    More about this item

    Keywords

    expected utility; prospect theory; target-based decisions; choice anomalies; benchmarking;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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