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Social context and the utility of wealth: Addressing the Markowitz challenge

Philip Coelho () and James McClure

No 199602, Working Papers from Ball State University, Department of Economics

Abstract: The expected utility hypothesis has a long successful tradition in economics. However, behavioral anomalies confound it when utility depends solely on the absolute level of wealth. Harry Markowitz (1952) suggested that the anomalies might be resolved if utility could be augmented to endogenize the taste for wealth in a non-tautological manner. This paper addresses Markowitz’s challenge. We augment the Markowitz utility function with arguments that have roots in the theory of natural selection: peer wealth, and status. Our specification yields testable implications about gambling, insuring and peer selection, and yields an explanation of the Allais paradox.

Keywords: Expected utility; Non-expected utility; risk; natural selection; sociobiology; reciprocal altruism; status; gambling; risk; insurance; Allais paradox (search for similar items in EconPapers)
JEL-codes: D00 D64 D81 (search for similar items in EconPapers)
Pages: 19 pages
Date: 1996-02, Revised 1998-01
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Published in Journal of Economic Behavior and Organization 37 (1998):305-314.

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http://econfac.bsu.edu/research/workingpapers/bsuecwp199602coelho.pdf First version, 1996 (application/pdf)

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