Optimism and Pessimism with Expected Utility, Third Version

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

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: Savage (1954) provides axioms on preferences over acts that are equivalent to the existence of a subjective expected utility representation. We show that there is a continuum of other \expected utility" representations in which for any act, the probability distribution over states depends on the corresponding outcomes and is first-order stochastically dominated by (dominates) the Savage distribution. We suggest that pessimism (optimism) can be captured by the stake-dependent probabilities in these alternate representations. We then extend the DM's preferences to be defined over both subjective acts and objective lotteries. Our result permits modeling ambiguity aversion in Ellsberg's two-urn experiment using pessimistic probability assessments, the same utility over prizes for lotteries and acts, and without relaxing Savage's axioms. An implication of our results is that the large body of existing research based on expected utility can, with a simple reinterpretation, be understood as modeling the behavior of optimistic or pessimistic decision makers.

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: 2011-08-01, Revised 2012-12-26
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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