Optimism and Pessimism with Expected Utility, Fourth Version

20 Pages Posted: 13 Dec 2013

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

Date Written: November 1, 2013

Abstract

Maximizing subjective expected utility is the classic model of decision-making under uncertainty. Savage (1954) provides axioms on preference over acts that are equivalent to the existence of a subjective expected utility representation, and further establishes that such a representation is essentially unique. We show that there is a continuum of other "expected utility" representations in which the probability distributions over states used to evaluate acts depend on the set of possible outcomes of the act and suggest that these alternate representations can capture pessimism or optimism. We then extend the DM's preferences to be defined over both subjective acts and objective lotteries, allowing for source-dependent preferences. Our result permits modeling ambiguity aversion in Ellsberg's two-urn experiment using a single utility function and pessimistic probability assessments over prizes for lotteries and acts, while maintaining the axioms of Savage and von Neumann-Morganstern on the appropriate domains.

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, Fourth Version (November 1, 2013). PIER Working Paper No. 13-068. Available at SSRN: https://ssrn.com/abstract=2366381 or http://dx.doi.org/10.2139/ssrn.2366381

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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