A Stochastic Expected Utility Theory
نویسنده
چکیده
This paper proposes a new model that explains the violations of expected utility theory through the role of random errors. The paper analyzes decision making under risk when individuals make random errors when they compute expected utilities. Errors are drawn from the normal distribution, which is truncated so that the stochastic utility of a lottery cannot be greater (lower) than the utility of the highest (lowest) possible outcome. The standard deviation of random errors is higher for lotteries with a wider range of possible outcomes. It converges to zero for lotteries converging to a degenerate lottery. The model explains all major stylized empirical facts such as the Allais paradox and the fourfold pattern of risk attitudes. The model fits the data from ten well-known experimental studies at least as good as cumulative prospect theory.
منابع مشابه
Choosing the Optimum Underground Mine Layout with Regard to Metal Price Uncertainty Using Expected Utility Theory
Metal price is one of the most important parameters in the calculation of cut- off grade. The cut- off grade has the main role in determination of mine layout. Mine layout actuates mineable reserve, mine life and economic profitability. Not considering the uncertainty in metal prices can lead to a non-optimal layout. In this paper optimum underground mine layout is determined by expected utilit...
متن کاملRisk premiums and certainty equivalents of loss-averse newsvendors of bounded utility
Loss-averse behavior makes the newsvendors avoid the losses more than seeking the probable gains as the losses have more psychological impact on the newsvendor than the gains. In economics and decision theory, the classical newsvendor models treat losses and gains equally likely, by disregarding the expected utility when the newsvendor is loss-averse. Moreover, the use of unbounded utility to m...
متن کاملExpected Utility and Risk on Stochastic Social Influence Networks
Expected utility and risk analysis for stochastic influence networks requires accounting for the complex interconnections between agents as well as between agents and stochastic phenomena. Conditional game theory provides a framework within which to study expected utility and risk for such networks. Key features of this approach are a) mechanism for modulating individual preferences in response...
متن کاملRational Choice Theory: A Cultural Reconsideration
Economists have heralded the formulation of the expected utility theorem as a universal method of choice under uncertainty. In their seminal paper, Stigler and Becker (Stigler & Becker, 1977) declared that “human behavior can be explained by a generalized calculus of utility-maximizing behavior” (p.76). The universality of the rational choice theory has been widely criticized by psychologists, ...
متن کاملRobustness and Uncertainty AversionLars
This paper connects robust control theory to the max-min expected utility model of uncertainty aversion. Max-min expected utility theory depicts preferences using multiple prior distributions. Robust control theory regards a unique controlled stochastic process as an approximation by introducing a set of perturbations to it. We link the two approaches by interpreting the perturbations in robust...
متن کاملRanking fuzzy sets and fuzzy random variables by means of stochastic orders
This paper establishes a theory of decision making under uncertainty with fuzzy utilities. The extension of expected utility and stochastic dominance to the comparison of sets of random variables plays a crucial role. Their properties as fuzzy rankings are studied, and their definitions are further generalized to the comparison of fuzzy random variables. Also, a connection between expected util...
متن کامل