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Optimism and Pessimism with Expected Utility, Second Version

Author

Listed:
  • David Dillenberger

    (Department of Economics, University of Pennsylvania)

  • Andrew Postlewaite

    (Department of Economics, University of Pennsylvania)

  • Kareen Rozen

    (Department of Economics, Yale University)

Abstract

Savage (1954) provided axioms on preferences over acts that were equivalent to the existence of an expected utility representation. We show that 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. Extending the DM's preferences to be defined on both subjective acts and objective lotteries, we suggest how one may distinguish optimists from pessimists and separate attitude towards uncertainty from curvature of the utility function over monetary prizes.

Suggested Citation

  • David Dillenberger & Andrew Postlewaite & Kareen Rozen, 2011. "Optimism and Pessimism with Expected Utility, Second Version," PIER Working Paper Archive 12-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 10 Aug 2012.
    • Handle: RePEc:pen:papers:12-031
    as

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    References listed on IDEAS

    as
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    Cited by:

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    2. Paola Manzini & Marco Mariotti, 2015. "Modelling Imperfect Attention," Working Papers 744, Queen Mary University of London, School of Economics and Finance.

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    More about this item

    Keywords

    Subjective expected utility; optimism; pessimism; stake-dependent probability;
    All these keywords.

    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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