Are CEOS Expected Utility Maximizers?

36 Pages Posted: 3 Nov 2009 Last revised: 24 Mar 2023

See all articles by John A. List

John A. List

University of Chicago - Department of Economics

Charles F. Mason

University of Wyoming - College of Business - Department of Economics and Finance

Date Written: October 2009

Abstract

Are individuals expected utility maximizers? This question represents much more than academic curiosity. In a normative sense, at stake are the fundamental underpinnings of the bulk of the last half-century's models of choice under uncertainty. From a positive perspective, the ubiquitous use of benefit-cost analysis across government agencies renders the expected utility maximization paradigm literally the only game in town. In this study, we advance the literature by exploring CEO's preferences over small probability, high loss lotteries. Using undergraduate students as our experimental control group, we find that both our CEO and student subject pools exhibit frequent and large departures from expected utility theory. In addition, as the extreme payoffs become more likely CEOs exhibit greater aversion to risk. Our results suggest that use of the expected utility paradigm in decision making substantially underestimates society's willingness to pay to reduce risk in small probability, high loss events.

Suggested Citation

List, John A. and Mason, Charles F., Are CEOS Expected Utility Maximizers? (October 2009). NBER Working Paper No. w15453, Available at SSRN: https://ssrn.com/abstract=1498954

John A. List (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Charles F. Mason

University of Wyoming - College of Business - Department of Economics and Finance ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-5336 (Phone)
307-766-5090 (Fax)

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