Expected Subjective Value Theory (ESVT): A Representation of Decision Under Risk and Certainty
39 Pages Posted: 25 May 2016 Last revised: 18 Oct 2022
Date Written: October 18, 2022
We present a descriptive model of choice derived from neuroscientific models of efficient value representation in the brain. Our basic model, a special case of Expected Utility Theory, can capture a number of behaviors predicted by Prospect Theory. It achieves this with only two parameters: a time-indexed "payoff expectation" (reference point) and a free parameter we call "predisposition". A simple extension of the model outside the domain of Expected Utility also captures the Allais Paradox. Our models shed new light on the computational origins and evolution of risk attitudes and aversion to outcomes below reward expectation (reference point). It delivers novel explanations of the endowment effect, he observed heterogeneity in probability weighting functions,
and the Allais Paradox, all with fewer parameters and higher descriptive accuracy than Prospect Theory.
Keywords: utility, decision-making, reference point, neuroeconomics
JEL Classification: D03, D81, D87
Suggested Citation: Suggested Citation