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

Abstract

We present a descriptive model of choice derived from neuroscientific models of efficient value representation in the brain. Our 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''. Our theory sheds 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 and the observed heterogeneity in probability weighting functions.

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

JEL Classification: D03, D81, D87