Are CEOs Expected Utility Maximizers?

John List () and Charles Mason

No 15453, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Are individuals expected utility maximizers? This question represents much more than academic curiosity. In a normative sense, at stake are the fundamental underpinnings of the bulk of the last half-century’s models of choice under uncertainty. From a positive perspective, the ubiquitous use of benefit-cost analysis across government agencies renders the expected utility maximization paradigm literally the only game in town. In this study, we advance the literature by exploring CEO’s preferences over small probability, high loss lotteries. Using undergraduate students as our experimental control group, we find that both our CEO and student subject pools exhibit frequent and large departures from expected utility theory. In addition, as the extreme payoffs become more likely CEOs exhibit greater aversion to risk. Our results suggest that use of the expected utility paradigm in decision making substantially underestimates society’s willingness to pay to reduce risk in small probability, high loss events.

JEL-codes: C9 C91 C93 Q5 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-upt
Date: 2009-10
Note: EEE PE
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