The Shape of Utility Functions and Organizational Behavior
Posted: 9 Sep 2003
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
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