The Shape of Utility Functions and Organizational Behavior

Posted: 9 Sep 2003

See all articles by Joost M. E. Pennings

Joost M. E. Pennings

Maastricht University; Wageningen UR

A. Smidts

Erasmus Research Institute of Management (ERIM)

Multiple version iconThere are 2 versions of this paper

Abstract

Based on measurements among 332 owner-managers (hog farmers), we investigate how the global shape of the utility function (i.e., S-shaped versus concave or convex over the total range of outcomes) relates to choice behavior. We find that the global shape of the utility function differs across decision makers (about one third of the owner-managers exhibit an S-shaped utility function) and that the global shape is linked to organizational behavior (i.e., the production system employed by hog farmers), a result that does not change when using different methods to identify the decision-maker's global shape of the utility function. The decision-maker's risk attitude (risk averse or risk seeking) does not affect the choice of the production system. Whereas the degree of risk aversion, based on the local shape of the utility function, may be important in explaining owner-managers' trading behavior (Pennings and Smidts 2000), more structural organizational behavior appears to be linked to the global shape of the utility function.

Keywords: Heterogeneity in Utility Functions; Organizational Behavior; S-shaped Utility Function, Real Decision Makers, Reference Points

JEL Classification: D0, C9, G0, L0, M0, Q0

Suggested Citation

Pennings, Joost M. E. and Smidts, Ale, The Shape of Utility Functions and Organizational Behavior. Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=424700

Joost M. E. Pennings (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Wageningen UR ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

Ale Smidts

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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