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Optimism and Pessimism with Expected Utility

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  • David Dillenberger
  • Andrew Postlewaite
  • Kareen Rozen

Abstract

Savage (1954) provided a set of axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that in addition to this representation, there is a continuum of other .expected utility.representations in which for any act, the probability distribution over states depends on the corresponding outcomes. We suggest that optimism and pessimism can be captured by the stake-dependent probabilities in these alternative representations; e.g., for a pessimist, the probability of every outcome except the worst is distorted down from the Savage probability. Extending the DM.s preferences to be defined on both subjective acts and objective lotteries, we show how one may distinguish optimists from pessimists and separate attitude towards uncertainty from curvature of the utility function over monetary prizes.
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  • David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2012. "Optimism and Pessimism with Expected Utility," Levine's Working Paper Archive 786969000000000353, David K. Levine.
    • Handle: RePEc:cla:levarc:786969000000000353
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Measuring optimists and pessimists
      by Economic Logician in Economic Logic on 2011-12-16 21:56:00

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    Cited by:

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    3. Miettinen, Topi & Kosfeld, Michael & Fehr, Ernst & Weibull, Jörgen, 2020. "Revealed preferences in a sequential prisoners’ dilemma: A horse-race between six utility functions," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 1-25.
    4. Weinstock, Eyal & Sonsino, Doron, 2014. "Are risk-seekers more optimistic? Non-parametric approach," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 236-251.
    5. Paola Manzini & Marco Mariotti, 2015. "Modelling Imperfect Attention," Working Papers 744, Queen Mary University of London, School of Economics and Finance.
    6. Gorno, Leandro & Natenzon, Paulo, 2018. "Subjective ambiguity and preference for flexibility," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 24-32.
    7. Kai Barron, 2021. "Belief updating: does the ‘good-news, bad-news’ asymmetry extend to purely financial domains?," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 31-58, March.
    8. Paola Manzini & Marco Mariotti, 2015. "Modelling Imperfect Attention," Working Papers 744, Queen Mary University of London, School of Economics and Finance.
    9. Mayraz, Guy, 2011. "Priors and desires," LSE Research Online Documents on Economics 121944, London School of Economics and Political Science, LSE Library.

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    More about this item

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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