Optimism and Pessimism with Expected Utility

20 Pages Posted: 26 Oct 2011 Last revised: 1 Nov 2011

See all articles by David Dillenberger

David Dillenberger

University of Pennsylvania - Department of Economics

Andrew Postlewaite

University of Pennsylvania - Department of Economics

Kareen Rozen

Brown University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 2011

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

JEL Classification: D80, D81

Suggested Citation

Dillenberger, David and Postlewaite, Andrew and Rozen, Kareen, Optimism and Pessimism with Expected Utility (October 25, 2011). PIER Working Paper No. 11-036; Cowles Foundation Discussion Paper No. 1829. Available at SSRN: https://ssrn.com/abstract=1949273 or http://dx.doi.org/10.2139/ssrn.1949273

David Dillenberger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1503 (Phone)

Andrew Postlewaite

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-7350 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~apostlew

Kareen Rozen

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

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