Optimism and Pessimism with Expected Utility (Second Version)
17 Pages Posted: 10 Aug 2012
Date Written: August 10, 2012
Savage (1954) provided axioms on preferences over acts that were equivalent to the existence of an 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. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations. Extending the DM's preferences to be defined on both subjective acts and objective lotteries, we suggest 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: Suggested Citation