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Expected utility with threshold disappointment sensitivity

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  • Honda, Edward

Abstract

We axiomatize a representation for preferences over lotteries. In the model, an agent is a standard expected utility maximizer satisfying risk neutrality when the probability of disappointing prizes are sufficiently low, but becomes sensitive and places extra weight on such prizes when the probability is too large. Such a decision maker may exhibit violations of Independence. The model can also be consistent with a type of behavior observed in the Allais Paradox.

Suggested Citation

  • Honda, Edward, 2022. "Expected utility with threshold disappointment sensitivity," Economics Letters, Elsevier, vol. 213(C).
    • Handle: RePEc:eee:ecolet:v:213:y:2022:i:c:s0165176522000441
    DOI: 10.1016/j.econlet.2022.110350
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    References listed on IDEAS

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    1. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
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    6. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    7. Dekel, Eddie, 1986. "An axiomatic characterization of preferences under uncertainty: Weakening the independence axiom," Journal of Economic Theory, Elsevier, vol. 40(2), pages 304-318, December.
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    More about this item

    Keywords

    Expected utility; Independence; Lottery;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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