Optimism and Pessimism with Expected Utility

David Dillenberger, Andrew Postlewaite and Kareen Rozen ()
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David Dillenberger: Dept. of Economics, University of Pennsylvania

No 1829, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Savage (1954) provided a set of axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that in addition to this representation, there is a continuum of other "expected utility" representations in which for any act, the probability distribution over states depends on the corresponding outcomes. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations; e.g., for a pessimist, the probability of every outcome except the worst is distorted down from the Savage probability. Extending the DM's preferences to be defined on both subjective acts and objective lotteries, we show how one may distinguish optimists from pessimists and separate attitude towards uncertainty from curvature of the utility function over monetary prizes.

Keywords: Subjective expected utility; Optimism; Pessimism; Stake-dependent probability (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2011-10
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Optimism and Pessimism with Expected Utility (2017)
Working Paper: Optimism and Pessimism with Expected Utility (2012)
Working Paper: Optimism and Pessimism with Expected Utility (2011)
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