Range-Dependent Utility

Krzysztof Kontek () and Michal Lewandowski
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Krzysztof Kontek: SGH Warsaw School of Economics, 02-554 Warszawa, Poland

Management Science, 2018, vol. 64, issue 6, 2812-2832

Abstract: First, this paper introduces and axiomatizes range-dependent utility as a new conceptual framework for decision making under risk. It is a simple and well-defined generalization of expected utility theory in which utility depends on the range of lottery outcomes. Second, a special case of this framework is proposed for prediction. It is based on applying a single utility function (decision utility) to every normalized lottery range. The resultant decision utility model predicts well-known expected utility paradoxes without recourse to probability weighting. Necessary and sufficient conditions for the model to satisfy monotonicity with respect to first-order stochastic dominance are identified. The typical decision utility function, which is confirmed by both experimental data and normative considerations, is S shaped.

Keywords: range-frequency model; expected utility; certainty equivalent; Allais paradox; probability weighting; stochastic; dominance violations (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:6:p:2812-2832

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