Generalized Expected Utility Theory

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Publisher : Springer Science & Business Media
ISBN 13 : 9401121826
Total Pages : 208 pages
Book Rating : 4.4/5 (11 download)

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Book Synopsis Generalized Expected Utility Theory by : John Quiggin

Download or read book Generalized Expected Utility Theory written by John Quiggin and published by Springer Science & Business Media. This book was released on 2012-12-06 with total page 208 pages. Available in PDF, EPUB and Kindle. Book excerpt: Economic analysis of choice under uncertainty has been dominated by the expected utility (EU) model, yet the EU model has never been without critics. Psychologists accumulated evidence that individual choices under uncertainty were inconsistent with the predictions of the EU model. Applied work in areas such as finance was dominated by the simpler mean-variance analysis. In the 1980s this skepticism was dispelled as a number of generalizations of EU were proposed, most of which were capable of explaining evidence inconsistent with EU, while preserving transitivity and dominance. Generalized expected utility is now a flourishing subfield of economics, with dozens of competing models and considerable literature exploring their theoretical properties and comparing their empirical performance. But the EU model remains the principal tool for the analysis of choice under uncertainty. There is a view that generalized models are too difficult to handle or incapable of generating sharp results. This creates a need to show that the new models can be used in the kinds of economic analysis for which EU has been used, and that they can yield new and interesting results. This book meets this need by describing one of the most popular generalized models -- the rank-dependent expected utility model (RDEU), also known as anticipated utility, EU with rank-dependent preferences, the dual theory of choice under uncertainty, and simply as rank-dependent utility. As the many names indicate, the model has been approached in many ways by many scientists and for this reason, consideration of a single model sheds light on many of the concerns that have motivated the development of generalized utility models. The popularity of the RDEU model rests on its simplicity and tractability. The standard tools of analysis developed for EU theory may be applied to the RDEU model, but since RDEU admits behavior inconsistent with EU, the field of potential applications is widened. As such, the RDEU model is not as much a competitor to EU as an extension based on less restrictive assumptions.

Risk Aversion in the Theory of Expected Utility with Rank Dependent Probabilities

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ISBN 13 :
Total Pages : 42 pages
Book Rating : 4.:/5 (636 download)

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Book Synopsis Risk Aversion in the Theory of Expected Utility with Rank Dependent Probabilities by : Chew Soo Hong

Download or read book Risk Aversion in the Theory of Expected Utility with Rank Dependent Probabilities written by Chew Soo Hong and published by . This book was released on 1985 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Heuristic arguments for probabilistic sensitivity and rank dependence

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Publisher : GRIN Verlag
ISBN 13 : 3656074666
Total Pages : 25 pages
Book Rating : 4.6/5 (56 download)

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Book Synopsis Heuristic arguments for probabilistic sensitivity and rank dependence by : Julia Plagemann

Download or read book Heuristic arguments for probabilistic sensitivity and rank dependence written by Julia Plagemann and published by GRIN Verlag. This book was released on 2011-12-02 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: Essay from the year 2011 in the subject Economics - Micro-economics, European University Viadrina Frankfurt (Oder) (Lehrstuhl für Allgemeine Betriebswirtschaftslehre, Mikroökonomie), course: Behavior under risk and uncertainty, language: English, abstract: I Introduction In Chapter 5 of his work "Prospect Theory", Wakker (2010) substantially aims to demonstrate the superiority of a rank-dependent utility (meaning a hierarchical sorted utility) over the "old" expected utility theory, which pre-sumes a linearity of utility. The relevant parameters by which the expected utility of its "founders" (von Neumann and Morgenstern (1944) is com-posed, are the utility, which is linked to a decision option, and the probability of occurrence, the likelihood that the decision option will lead to the desired outcome. A decision problem for person 1 between the decision options A and B, therefore, is demonstrated as the choice of probabilities of occurrences, which by Neumann and Morgenstern (1944) were shaped linearly as follows: D = pA + (1-p)B Thus the probability after von Neumann and Morgenstern becomes an output-oriented choice between the different option's probabilities. Figure 1 shows the relationship between two options A and B for two randomly chosen distributions as a probability distribution function. As can be learnt from figure 1, the probability of the choice of option A increases linearly, whereas the corresponding probability for option B can be seen as a directly opposed probability, which decreases to the same degree to which the probability of option A increases. The two options are essentially inversely correlated with one another. This graphic illustration implies the conviction, that the choice between two options is a choice between equally weighted risks, whereas the one option is chosen, for which the product of risk (probability) and utility is most beneficial. An outcome of 10 (see figure 1) therefore is more likely for option B, while an outcome of 25 is more likely for option A. Contrary to this assumption of linearity a number of objections were pro-duced, which were also addressed by Tversky and Kahnemann in their work published in 1986. In his contributing article, Wakker (2010) aims to identify an intuitive heu-ristic, pointing out that the improvement of identifying risk as a non-linear parameter determined by a rank dependent utility should be made. There-fore he divides Chapter 5 into three different parts: 1) The first part argues that risk aversion is not linear 2) Part two shows, that former suggested psychological solutions in order to do justice to the non-linearity of risk aversion are not sufficient 3) Finally, part three presents the concept of rank dependent utility

Distorted Probabilities and Choice under Risk

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Publisher : Springer Science & Business Media
ISBN 13 : 3642582036
Total Pages : 109 pages
Book Rating : 4.6/5 (425 download)

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Book Synopsis Distorted Probabilities and Choice under Risk by : Clemens Puppe

Download or read book Distorted Probabilities and Choice under Risk written by Clemens Puppe and published by Springer Science & Business Media. This book was released on 2012-12-06 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: During the development of modern probability theory in the 17th cen tury it was commonly held that the attractiveness of a gamble offering the payoffs :1:17 ••• ,:l: with probabilities Pl, . . . , Pn is given by its expected n value L:~ :l:iPi. Accordingly, the decision problem of choosing among different such gambles - which will be called prospects or lotteries in the sequel-was thought to be solved by maximizing the corresponding expected values. The famous St. Petersburg paradox posed by Nicholas Bernoulli in 1728, however, conclusively demonstrated the fact that individuals l consider more than just the expected value. The resolution of the St. Petersburg paradox was proposed independently by Gabriel Cramer and Nicholas's cousin Daniel Bernoulli [BERNOULLI 1738/1954]. Their argument was that in a gamble with payoffs :l:i the decisive factors are not the payoffs themselves but their subjective values u( :l:i)' According to this argument gambles are evaluated on the basis of the expression L:~ U(Xi)pi. This hypothesis -with a somewhat different interpretation of the function u - has been given a solid axiomatic foundation in 1944 by v. Neumann and Morgenstern and is now known as the expected utility hypothesis. The resulting model has served for a long time as the preeminent theory of choice under risk, especially in its economic applications.

Risk Aversion with State-Dependent Preferences in the Rank-Dependent Expected Utility Theory

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Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (137 download)

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Book Synopsis Risk Aversion with State-Dependent Preferences in the Rank-Dependent Expected Utility Theory by : W. Henry Chiu

Download or read book Risk Aversion with State-Dependent Preferences in the Rank-Dependent Expected Utility Theory written by W. Henry Chiu and published by . This book was released on 1998 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We extend the analysis of risk aversion with state-dependent preferences to the Rank-dependent Expected Utility theory. We find that in this extended theory, for two preference relations to be comparable in risk aversion, not only do their reference sets need to coincide (a condition first introduced by Karni (1983, 85) in the original Expected Utility framework), but they must also rank the prospective state-dependent outcomes in the same manner. We formalize this additional condition by introducing the concept of certainty sets. Under our condition of comparability, various results and characterizations of interpersonal comparison of risk aversion are obtained. The implications for a specific insurance problem are also discussed.

Handbook of Utility Theory

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Publisher : Springer Science & Business Media
ISBN 13 : 1402079648
Total Pages : 636 pages
Book Rating : 4.4/5 (2 download)

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Book Synopsis Handbook of Utility Theory by : Salvador Barbera

Download or read book Handbook of Utility Theory written by Salvador Barbera and published by Springer Science & Business Media. This book was released on 2004-03-31 with total page 636 pages. Available in PDF, EPUB and Kindle. Book excerpt: The standard rationality hypothesis is that behaviour can be represented as the maximization of a suitably restricted utility function. This hypothesis lies at the heart of a large body of recent work in economics, of course, but also in political science, ethics, and other major branches of the social sciences. Though this hypothesis of utility maximization deserves our continued respect, finding further refinements and developing new critiques remain areas of active research. In fact, many fundamental conceptual problems remain unsettled. Where others have been resolved, their resolutions may be too recent to have achieved widespread understanding among social scientists. Last but not least, a growing number of papers attempt to challenge the rationality hypothesis head on, at least in its more orthodox formulation. The main purpose of this Handbook is to make more widely available some recent developments in the area. Yet we are well aware that the final chapter of a handbook like this can never be written as long as the area of research remains active, as is certainly the case with utility theory. The editors originally selected a list of topics that seemed ripe enough at the time that the book was planned. Then they invited contributions from researchers whose work had come to their attention. So the list of topics and contributors is largely the editors' responsibility, although some potential con tributors did decline our invitation. Each chapter has also been refereed, and often significantly revised in the light of the referees' remarks.

Prospect Theory

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Publisher : Cambridge University Press
ISBN 13 : 1139489100
Total Pages : 519 pages
Book Rating : 4.1/5 (394 download)

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Book Synopsis Prospect Theory by : Peter P. Wakker

Download or read book Prospect Theory written by Peter P. Wakker and published by Cambridge University Press. This book was released on 2010-07-22 with total page 519 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prospect Theory: For Risk and Ambiguity, provides a comprehensive and accessible textbook treatment of the way decisions are made both when we have the statistical probabilities associated with uncertain future events (risk) and when we lack them (ambiguity). The book presents models, primarily prospect theory, that are both tractable and psychologically realistic. A method of presentation is chosen that makes the empirical meaning of each theoretical model completely transparent. Prospect theory has many applications in a wide variety of disciplines. The material in the book has been carefully organized to allow readers to select pathways through the book relevant to their own interests. With numerous exercises and worked examples, the book is ideally suited to the needs of students taking courses in decision theory in economics, mathematics, finance, psychology, management science, health, computer science, Bayesian statistics, and engineering.

Foundations of Utility and Risk Theory with Applications

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Publisher : Springer Science & Business Media
ISBN 13 : 9401715904
Total Pages : 487 pages
Book Rating : 4.4/5 (17 download)

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Book Synopsis Foundations of Utility and Risk Theory with Applications by : Bernt P. Stigum

Download or read book Foundations of Utility and Risk Theory with Applications written by Bernt P. Stigum and published by Springer Science & Business Media. This book was released on 2013-03-09 with total page 487 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this volume we present some o~ the papers that were delivered at FUR-82 - the First International Con~erence on Foundations o~ Utility and Risk Theory in Oslo, June 1982. The purpose o~ the con~erence was to provide a ~orum within which scientists could report on interesting applications o~ modern decision theory and exchange ideas about controversial issues in the ~oundations o~ the theory o~ choice under un certainty. With that purpose in mind we have selected a mixture of applied and theoretical papers that we hope will appeal to a wide spectrum o~ readers ~rom graduate students in social science departments and business schools to people involved in making hardheaded decisions in business and government. In an introductory article Ole Hagen gives an overview o~ various paradoxes in utility and risk theory and discusses these in the light o~ scientific methodology. He concludes the article by calling ~or joint efforts to provide decision makers with warkable theories. Kenneth Arrow takes up the same issue on a broad basis in his paper where he discusses the implications o~ behavior under uncertainty for policy. In the theoretical papers the reader will ~ind attempts at de~initive Statements of the meaning o~ old concepts and suggestions for the adoption o~ new concepts. For instance, Maurice Allais discusses four di~ferent interpretations o~ the axioms o~ probability and explains the need ~or an empirical characterization o~ the concept of chance.

Expected Utility Theory and Inner and Outer Measures of Loss Aversion

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Publisher :
ISBN 13 :
Total Pages : 37 pages
Book Rating : 4.:/5 (13 download)

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Book Synopsis Expected Utility Theory and Inner and Outer Measures of Loss Aversion by : G. Charles-Cadogan

Download or read book Expected Utility Theory and Inner and Outer Measures of Loss Aversion written by G. Charles-Cadogan and published by . This book was released on 2018 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: We introduce a weak rank dependent utility (RDU) model, with one extra parameter compared to the canonical expected utility (EUT) model, which makes many of the same predictions as cumulative prospect theory (CPT). The model extends a set of nonconvex preferences to its maximal inner convex subset, satisfies stochastic dominance principles, resolves the Allais paradox, predicts CPT fourfold pattern of risk attitudes, and characterizes reference dependent preferences. Unlike extant RDU models that transform probability weighting functions (pwfs), our model transforms ranked choice sets while leaving objective probabilities intact. So pwfs are hidden in our model. CPT's loss aversion index is a special case of the interior solution for the extra parameter for unconstrained utility maximization, and it is driven by tail probabilities in our model. We provide several examples to show how popular formulae for the loss aversion index can be classified into inner and outer measures of loss aversion via an approximate Radon-Nikodym formulation of the model. This resolves sources of disparity in estimating the loss aversion index with experimental data. We show that under extant approaches, the loss aversion index is best estimated by a mixture of inner and outer measures of itself. Further- more, we identify a CPT paradox: The utility loss aversion index is unmeasurable under CPT nonexpected utility framework for mixed lotteries; but measurable for same under the expected utility paradigm adapted to our model.

Experiments on Decisions under Risk: The Expected Utility Hypothesis

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Publisher : Springer Science & Business Media
ISBN 13 : 9401750408
Total Pages : 228 pages
Book Rating : 4.4/5 (17 download)

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Book Synopsis Experiments on Decisions under Risk: The Expected Utility Hypothesis by : P.J.H. Schoemaker

Download or read book Experiments on Decisions under Risk: The Expected Utility Hypothesis written by P.J.H. Schoemaker and published by Springer Science & Business Media. This book was released on 2013-11-11 with total page 228 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this valuable book, Paul Schoemaker summarizes recent experimental and field research that he and others have undertaken regarding the descrip tive validity of expected utility theory as a model of choice under uncer tainty. His principal message is that this paradigm is too narrow in its con ception and misses some of the important elements of a descriptive model of individual choice. In particular, Schoemaker calls attention to the impor tance of individual differences, task effects, and context effects as they influence behavior. The expected utility hypothesis has come under scrutiny in recent years from a number of different quarters. This book brings together these many studies and relates them to the large body of literature on individual de cision making under risk. Although this paradigm may be appropriate for describing behavior under many conditions of uncertainty, Schoemaker presents convincing evidence that it does not do well with respect to protec tion against low-probability events. For example, he shows that the insur ance purchase decision is influenced by the way information is presented to the client, as well as by the statistical knowledge of the respondents.

New Economics of Risk and Uncertainty

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Publisher : Nova Publishers
ISBN 13 : 9781600217456
Total Pages : 128 pages
Book Rating : 4.2/5 (174 download)

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Book Synopsis New Economics of Risk and Uncertainty by : Moawia Alghalith

Download or read book New Economics of Risk and Uncertainty written by Moawia Alghalith and published by Nova Publishers. This book was released on 2007 with total page 128 pages. Available in PDF, EPUB and Kindle. Book excerpt: Presents an alternative theoretical framework that can serve as the basis for a new age of economic analysis under risk and uncertainty. This work features an endogenous theory that overcomes the major shortcomings of both the expected utility and the rank-dependent models while it possesses the merits of both.

Models of Risk Preferences

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Publisher : Emerald Group Publishing
ISBN 13 : 1837972680
Total Pages : 265 pages
Book Rating : 4.8/5 (379 download)

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Book Synopsis Models of Risk Preferences by : Glenn W. Harrison

Download or read book Models of Risk Preferences written by Glenn W. Harrison and published by Emerald Group Publishing. This book was released on 2023-10-23 with total page 265 pages. Available in PDF, EPUB and Kindle. Book excerpt: Models of Risk Preferences collects studies that critically review alternatives to Expected Utility Theory from the perspective of experimental economics.

Risk Aversion in Experiments

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Publisher : Emerald Group Publishing
ISBN 13 : 1849505470
Total Pages : 449 pages
Book Rating : 4.8/5 (495 download)

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Book Synopsis Risk Aversion in Experiments by : G.W. Harrison

Download or read book Risk Aversion in Experiments written by G.W. Harrison and published by Emerald Group Publishing. This book was released on 2008-02-29 with total page 449 pages. Available in PDF, EPUB and Kindle. Book excerpt: Presents research utilizing laboratory experimental methods in economics.

Predicting Behavior in Games

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ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (139 download)

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Book Synopsis Predicting Behavior in Games by : Manel Baucells

Download or read book Predicting Behavior in Games written by Manel Baucells and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Rank dependent probability weighting--an integral part of cumulative prospect theory--has come to dominate the behavioral modeling of risk preferences in non-strategic settings over the last 40 years. We draw attention to some serious limitations of rank dependence when it comes to game-theoretic settings. First, in strategic settings where the probability of payoffs may be determined by the joint choice of all players, ranking outcomes (in a matrix) from lowest to highest becomes psychologically unnatural. Second, existence and interpretation of equilibrium when players possess rank-dependent preferences is problematic. Third, rank dependent models are notoriously complex to compute. In contrast, we argue that an alternative model, range utility theory, preserves much of the descriptive realism of rank-dependent utility, while sharing the theoretical and computational advantages of expected utility. We compare the two models using simple games of strategy as examples, and discuss the importance of accounting for loss aversion.

A Schur-concave Characterization of Risk Aversion for Non-expected Utility Preferences

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Publisher :
ISBN 13 :
Total Pages : 50 pages
Book Rating : 4.:/5 (318 download)

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Book Synopsis A Schur-concave Characterization of Risk Aversion for Non-expected Utility Preferences by : Soo Hong Chew

Download or read book A Schur-concave Characterization of Risk Aversion for Non-expected Utility Preferences written by Soo Hong Chew and published by . This book was released on 1994 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Non-Expected Utility and Risk Management

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Publisher : Springer Science & Business Media
ISBN 13 : 9401724407
Total Pages : 147 pages
Book Rating : 4.4/5 (17 download)

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Book Synopsis Non-Expected Utility and Risk Management by : Christian Gollier

Download or read book Non-Expected Utility and Risk Management written by Christian Gollier and published by Springer Science & Business Media. This book was released on 2013-03-14 with total page 147 pages. Available in PDF, EPUB and Kindle. Book excerpt: Expected utility provides simple, testable properties of the optimum behavior that should be displayed by risk-averse individuals in risky decisions. Simultaneously, given the existence of paradoxes under the expected utility paradigm, expected utility can only be regarded as an approximation of actual behavior. A more realistic model is needed. This is particularly true when treating attitudes toward small probability events: the standard situation for insurable risks. Non-Expected Utility and Risk Management examines whether the existing results in insurance economics are robust to more general models of behavior under risk.

Working Paper

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Publisher :
ISBN 13 :
Total Pages : 56 pages
Book Rating : 4.:/5 ( download)

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Book Synopsis Working Paper by :

Download or read book Working Paper written by and published by . This book was released on 1979 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: