IDEAS home Printed from https://ideas.repec.org/p/nwu/cmsems/1037.html
   My bibliography  Save this paper

Expected Value

Author

Listed:
  • Robert Lapson

Abstract

A procedure for decision-making under risk is developed and axiomatized. It provides another explanation for the Allais paradox as well as justification for some other preference patterns that can not be represented by the expected utility model, but it includes expected utility representation fo preferences as a particular case. The idea of the procedure is that evaluation of the lotteries takes two steps. First, a decision maker classifies a lottery as a "bad," "good" or "medium" one. Then comparing the lotteries the decision maker uses lexicographic ordering between the classes and expected utility value (with possibly different utility scales for different classes) within each of the three categories. The paper contains comparison of the suggested procedure with several other non-expected utility models. Many preference patterns that motivated the other models can be explained within the suggested procdedure. Key Words: threshold, expected utility, Allais paradox.

Suggested Citation

  • Robert Lapson, 1992. "Expected Value," Discussion Papers 1037, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1037
    as

    Download full text from publisher

    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1037.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-1092, July.
    2. Handa, Jagdish, 1977. "Risk, Probabilities, and a New Theory of Cardinal Utility," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 97-122, February.
    3. Loomes, Graham & Sugden, Robert, 1983. "A Rationale for Preference Reversal," American Economic Review, American Economic Association, vol. 73(3), pages 428-432, June.
    4. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    5. Fishburn, P.C., 1984. "SSB Utility theory: an economic perspective," Mathematical Social Sciences, Elsevier, vol. 8(1), pages 63-94, August.
    6. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    7. Slovic, Paul & Lichtenstein, Sarah, 1983. "Preference Reversals: A Broader Perspective," American Economic Review, American Economic Association, vol. 73(4), pages 596-605, September.
    8. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    9. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    10. Edi Karni & Zvi Safra, 1989. "Dynamic Consistency, Revelations in Auctions and the Structure of Preferences," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 56(3), pages 421-433.
    11. Karni, Edi & Safra, Zvi, 1987. ""Preference Reversal' and the Observability of Preferences by Experimental Methods," Econometrica, Econometric Society, vol. 55(3), pages 675-685, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karni, Edi & Schmeidler, David, 1990. "Utility Theory and Uncertainty," Foerder Institute for Economic Research Working Papers 275480, Tel-Aviv University > Foerder Institute for Economic Research.
    2. Trabelsi, Mohamed Ali, 2006. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ? [The new models of decision under risk or uncertainty : What approach?]," MPRA Paper 25442, University Library of Munich, Germany.
    3. Marc Willinger, 1990. "La rénovation des fondements de l'utilité et du risque," Revue Économique, Programme National Persée, vol. 41(1), pages 5-48.
    4. Trabelsi, Mohamed Ali, 2006. "Les nouveaux modèles de décision dans le risque et l’incertain : quel apport ? [The new models of decision under risk or uncertainty : What approach?]," MPRA Paper 25442, University Library of Munich, Germany.
    5. Daniel R. Burghart, 2020. "The two faces of independence: betweenness and homotheticity," Theory and Decision, Springer, vol. 88(4), pages 567-593, May.
    6. Weber, Elke U., 1989. "A Behavioral Approach To Decision Making Under Uncertainty: Implications And Lessons For Expected Utility Theory," 1989 Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk Meeting, April 9-12, 1989, Sanibel Island, Florida 271520, Regional Research Projects > S-232: Quantifying Long Run Agricultural Risks and Evaluating Farmer Responses to Risk.
    7. Karni, Edi & Maccheroni, Fabio & Marinacci, Massimo, 2015. "Ambiguity and Nonexpected Utility," Handbook of Game Theory with Economic Applications,, Elsevier.
    8. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    9. Zvi Safra & Uzi Segal, 2005. "Are Universal Preferences Possible? Calibration Results for Non-Expected Utility Theories," Boston College Working Papers in Economics 633, Boston College Department of Economics.
    10. repec:cup:judgdm:v:16:y:2021:i:6:p:1324-1369 is not listed on IDEAS
    11. Ulrich Schmidt & Chris Starmer & Robert Sugden, 2008. "Third-generation prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 203-223, June.
    12. Han Bleichrodt & Peter P. Wakker, 2015. "Regret Theory: A Bold Alternative to the Alternatives," Economic Journal, Royal Economic Society, vol. 0(583), pages 493-532, March.
    13. Belianin, A., 2017. "Face to Face to Human Being: Achievements and Challenges of Behavioral Economics," Journal of the New Economic Association, New Economic Association, vol. 34(2), pages 166-175.
    14. Elisabeth Jardin, 1996. "Problèmes d'assurance et utilité décumulative," Revue Économique, Programme National Persée, vol. 47(4), pages 921-935.
    15. James Cox & Vjollca Sadiraj & Ulrich Schmidt, 2015. "Paradoxes and mechanisms for choice under risk," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 215-250, June.
    16. Sudeep Bhatia & Graham Loomes & Daniel Read, 2021. "Establishing the laws of preferential choice behavior," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 16(6), pages 1324-1369, November.
    17. Liang Zou, 2006. "An Alternative to Prospect Theory," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 1-28, May.
    18. Miljkovic, Dragan, 2005. "Rational choice and irrational individuals or simply an irrational theory: A critical review of the hypothesis of perfect rationality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(5), pages 621-634, October.
    19. Trabelsi, Mohamed Ali, 2006. "Les Nouveaux Modèles de Décision dans le Risque et l’Incertain : Quel Apport ? [The New Models of Decision Under Risk or Uncertainty : What Approach?]," MPRA Paper 76954, University Library of Munich, Germany.
    20. Itzhak Gilboa & Andrew Postlewaite & Larry Samuelson & David Schmeidler, 2019. "What are axiomatizations good for?," Theory and Decision, Springer, vol. 86(3), pages 339-359, May.
    21. Colson, Gérard, 1993. "Prenons-nous assez de risque dans les théories du risque?," L'Actualité Economique, Société Canadienne de Science Economique, vol. 69(1), pages 111-141, mars.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1037. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fran Walker (email available below). General contact details of provider: https://edirc.repec.org/data/cmnwuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.