Expected Subjective Value Theory (ESVT): A Representation of Decision Under Risk and Certainty

Abstract

We present an overview of a novel descriptive model of choice with normative foundations based on how the brain is thought to represent value. An individual’s behavior is fully described by two primitives: an individual’s reference point and a free parameter we call “predisposition”. We demonstrate the breadth of the model, showing that it captures many of the behavioral phenomena described by Prospect Theory, but unlike Prospect Theory i) accounts for individual heterogeneity in parameters, ii) employs fewer parameters than prospect theory, and iii) retains neurobiological plausibility as a causal model of the choice process. Additionally, our theory makes a series of novel predictions amenable to future testing and includes alternative explanations for the endowment effect and the probability weighting function.

Keywords: utility, decision-making, reference point, neuroeconomics

JEL Classification: D03, D81, D87