Envy and Altruism: Contrasting Bivariate and Univariate Prospect Preferences
The Scandinavian Journal of Economics, Forthcoming
42 Pages Posted: 19 Sep 2012 Last revised: 23 Nov 2015
Date Written: 2016
The effect of envy and altruism on investment choices is analyzed by employing utility-free bivariate First-degree Stochastic Dominance (FSD) rule. Using the classic expected utility as the benchmark we find that envy or altruism may induce univariate FSD violation, hence a violation of the classic expected utility monotonicity axiom. Thus, the negative result is that an FSD inferior prospect may be selected inducing expected utility loss. Surprisingly, not only envy but also altruism may induce “contingent money burning” causing a reduction in the classic univariate expected utility of both the investor and her peer group. The positive result is that the bivariate SD efficient set always contains the univaraite SD efficient set. Hence, for some investors a careful selection from the bivariate efficient set may avoid the economic loss.
Keywords: bivariate preferences, envy, altruism, expected utility burning, contingent money burning, stochastic dominance, decision-making, efficiency analysis
JEL Classification: D64, D81, G11
Suggested Citation: Suggested Citation