# Accounting for optimism and pessimism in expected utility

*Craig Webb* and
*Horst Zank*

*Journal of Mathematical Economics*, 2011, vol. 47, issue 6, 706-717

**Abstract:**
We provide a preference foundation for decision under risk resulting in a model where probability weighting is linear as long as the corresponding probabilities are not extreme (i.e., 0 or 1). This way, most of the elegance and mathematical tractability of expected utility is maintained and also much of its normative foundation. Yet, the new model can accommodate the extreme sensitivity towards changes from 0 to almost impossible and from almost certain to 1 that has widely been documented in the experimental literature. The model can be viewed as “expected utility with the best and worst in mind” as suggested by Chateauneuf, Eichberger and Grant (Chateauneuf, Alain, Eichberger, Jürgen, Grant, Simon, 2007. Choice under uncertainty with the best and worst in mind: NEO-Additive capacities. Journal of Economic Theory 137, 538–567) or, following our preference foundation, interpreted as “expected utility with consistent optimism and pessimism”.

**Keywords:** Expected utility; Optimism and pessimism; Probability weighting function; Preference foundation; Prospect theory; Rank-dependent utility (search for similar items in EconPapers)

**Date:** 2011

**References:** View references in EconPapers View complete reference list from CitEc

**Citations:** View citations in EconPapers (14)

**Downloads:** (external link)

http://www.sciencedirect.com/science/article/pii/S0304406811000887

Full text for ScienceDirect subscribers only

**Related works:**

Working Paper: Accounting for Optimism and Pessimism in Expected Utility (2011)

This item may be available elsewhere in EconPapers: Search for items with the same title.

**Export reference:** BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text

**Persistent link:** https://EconPapers.repec.org/RePEc:eee:mateco:v:47:y:2011:i:6:p:706-717

**DOI:** 10.1016/j.jmateco.2011.09.007

Access Statistics for this article

Journal of Mathematical Economics is currently edited by *Atsushi (A.) Kajii*

More articles in Journal of Mathematical Economics from Elsevier

Bibliographic data for series maintained by Catherine Liu ().