A Theory of Decision-Making Under Risk as a Tradeoff between Expected Utility, Expected Utility Deviation and Expected Utility Skewness

2014 ◽  
Author(s):  
Pavlo R. Blavatskyy
Keyword(s):  
Decision Making ◽  
Expected Utility ◽  
Decision Making Under Risk

scholarly journals ECONOMICS OF RANDOMNESS: BEHAVIORAL ASPECTS OF DECISION MAKING UNDER RISK

2017 ◽  
Vol 9 (2) ◽  
pp. 7-14
Author(s):  
Alexander Krasilnikov
Keyword(s):  
Decision Making ◽  
Risk Analysis ◽  
Uncertainty Analysis ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Probabilistic Methods ◽  
Risk And Uncertainty ◽  
Decision Making Under Risk ◽  
History Of

The paper discusses evolution of the concept of risk in economics. History of probabilistic methods and approaches to risk and uncertainty analysis is considered. Expected utility theory, behavioral approaches, heuristic models and methods of neuroeconomics are analyzed. Author investigates stability of neoclassical program related to risk analysis and suggests further directions of development.

Measuring Utility, Destabilizing EUT

2018 ◽  
pp. 261-280
Author(s):  
Ivan Moscati
Keyword(s):  
Decision Making ◽  
Behavioral Economics ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Behavioral Models ◽  
Decision Making Under Risk ◽  
Utility Measurement ◽  
Elicitation Methods ◽  
Series Of Experiments

Chapter 16 shows how the validity of expected utility theory (EUT) was increasingly called into question between the mid-1960s and the mid-1970s and discusses how a series of experiments performed from 1974 to 1985 undermined the earlier confidence that EUT makes it possible to measure utility. Beginning in the mid-1960s, in a series of experiments seminal to the field later called behavioral economics, Sarah Lichtenstein, Paul Slovic, Amos Tversky, and others showed that decision patterns violating EUT are systematic. The new experimenters who engaged with the EUT-based measurement of utility from the mid-1970s, namely Uday Karmarkar, Richard de Neufville, Paul Schoemaker, and coauthors, showed that different elicitation methods to measure utility, which according to EUT should produce the same outcome, generate different measures. These findings contributed to destabilizing EUT, undermined the confidence in EUT-based utility measurement, and helped foster a blossoming of novel behavioral models of decision-making under risk.

From Chicago to Paris

2018 ◽  
pp. 177-192
Author(s):  
Ivan Moscati
Keyword(s):  
Decision Making ◽  
Utility Function ◽  
Expected Utility ◽  
Economic Model ◽  
Expected Utility Theory ◽  
Second Phase ◽  
Cardinal Utility ◽  
Decision Making Under Risk ◽  
The Face

Chapter 11 studies the second phase of the debate on expected utility theory (EUT), which commenced in May 1950, when Paul Samuelson, Leonard J. Savage, Jacob Marschak, Milton Friedman, and William Baumol initiated an intense exchange of letters. These economists argued about the exact assumptions underlying EUT, quarreled over whether these assumptions are compelling requisites for rational behavior under risk, and debated the nature of the cardinal utility function u featured in EUT. This correspondence modified the views of all five economists and transformed Samuelson into a supporter of EUT. In a prominent conference in Paris in May 1952, Friedman, Savage, Marschak, and Samuelson advocated EUT in the face of attacks from Maurice Allais and other opponents of the theory. The Paris conference and the publication of an Econometrica symposium on EUT in October 1952 marked the emergence of EUT as the mainstream economic model of decision-making under risk.

scholarly journals Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show

2008 ◽  
Vol 98 (1) ◽  
pp. 38-71 ◽  
Author(s):  
Thierry Post ◽  
Martijn J van den Assem ◽  
Guido Baltussen ◽  
Richard H Thaler
Keyword(s):  
Decision Making ◽  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Path Dependence ◽  
Expected Utility Theory ◽  
Decision Making Under Risk ◽  
Game Show ◽  
Dependent Choice

We examine the risky choices of contestants in the popular TV game show “Deal or No Deal” and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well defined, and when large real monetary amounts are at stake. (JEL D81)

scholarly journals Incremental Decision Making Under Risk with the Weighted Expected Utility Model

2017 ◽  
Author(s):  
Hugo Gilbert ◽  
Nawal Benabbou ◽  
Patrice Perny ◽  
Olivier Spanjaard ◽  
Paolo Viappiani
Keyword(s):  
Decision Making ◽  
Decision Maker ◽  
Expected Utility ◽  
Optimal Solution ◽  
Experimental Results ◽  
Utility Model ◽  
Decision Making Under Risk ◽  
Elicitation Procedure ◽  
Expected Utility Model

This paper deals with decision making under risk with the Weighted Expected Utility (WEU) model, which is a model generalizing expected utility and providing stronger descriptive possibilities. We address the problem of identifying, within a given set of lotteries, a (near-)optimal solution for a given decision maker consistent with the WEU theory. The WEU model is parameterized by two real-valued functions. We propose here a new incremental elicitation procedure to progressively reduce the imprecision about these functions until a robust decision can be made. We also give experimental results showing the practical efficiency of our method.

scholarly journals Farm decision making under risk and uncertainty

1997 ◽  
Vol 45 (2) ◽  
pp. 307-328 ◽  
Author(s):  
G.B.C. Backus ◽  
V.R. Eidman ◽  
A.A. Dijkhuizen
Keyword(s):  
Decision Making ◽  
Expected Utility ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Decision Problems ◽  
Subjective Expected Utility ◽  
Risk And Uncertainty ◽  
Decision Making Under Risk ◽  
Agricultural Risk ◽  
Risk Research

Relevant portions of the risk literature are reviewed, relating them to observed behaviour in farm decision-making. Relevant topics for applied agricultural risk research are proposed. The concept of decision making under risk and uncertainty is discussed by reviewing the theory of Subjective Expected Utility and its limitations. Subjective Expected Utility theory is the major framework for thinking systematically through complex issues of decision. Limitations of Subjective Expected Utility theory were that its application to unique decisions is doubtful, that it does not contribute to difficulties in determining the available decision alternatives, and that it is cast in a timeless setting, making the theoretic framework to a very limited extent helpful to solve real world decision problems. Most empirical studies indicate that farmers are risk neutral to slightly risk averse. It is doubtful whether decision makers could be classified according to their risk preferences. A presented overview of applied risk responses reveals much attention for diversification of the enterprise and of production practices, maintaining reserves, and farm expansion. Research reports on observed problems in farm decision making behaviour are lacking. Proposed topics for agricultural risk research include the assessment of the need for a strategic change, the creation of databases to determine both the (co)variances of input and output prices, the effectiveness of various kinds of decision support for different decision problems, and methods for applied scenario analysis to deal with long-run risk.

scholarly journals The dynamics of change in decision making under risk

Psihologija ◽  
2007 ◽  
Vol 40 (1) ◽  
pp. 147-164 ◽  
Author(s):  
Aleksandar Milicevic ◽  
Dubravka Pavlicic ◽  
Aleksandar Kostic
Keyword(s):  
Decision Making ◽  
Prospect Theory ◽  
Expected Utility ◽  
Empirical Evaluation ◽  
Expected Value ◽  
Decision Making Under Risk ◽  
Outcome Probability ◽  
Made In ◽  
The Way

The goal of this study was to investigate the dynamics of decision making under risk. In three experiments this dynamics have been explored with respect to probability of outcome and with respect to frame, i.e. the way the outcomes of the alternatives have been specified. The process of decision making was explored within a framework of expected utility and Prospect theory. The outcomes of alternatives as well as their probabilities were quantitatively specified (so that the expected value of a risk alternative was equal to the value of a non-risk alternative). The results of experiments indicate that the attitude towards risk (risk-proneness vs. risk-averseness) depends on the outcome probability and the way the outcomes were specified (i.e. positive/negative frame). It was also demonstrated that content strongly affects the choices made in decision making. This outcome is somewhat unexpected and requires additional empirical evaluation.

scholarly journals Unrealistic optimism and decision making

Psihologija ◽  
2009 ◽  
Vol 42 (4) ◽  
pp. 567-584
Author(s):  
Bojana Bozovic ◽  
Vasilije Gvozdenovic
Keyword(s):  
Decision Making ◽  
Expected Utility ◽  
Framing Effect ◽  
Risk Averse ◽  
Subjective Probabilities ◽  
Unrealistic Optimism ◽  
Decision Making Under Risk ◽  
Risk Seeking ◽  
Individual Decisions ◽  
Descriptive Theories

One of the leading descriptive theories of decision-making under risk, Tversky & Kahneman's Prospect theory, reveals that normative explanation of decisionmaking, based only on principle of maximizing outcomes expected utility, is unsustainable. It also underlines the effect of alternative factors on decision-making. Framing effect relates to an influence that verbal formulation of outcomes has on choosing between certain and risky outcomes; in negative frame people tend to be risk seeking, whereas in positive frame people express risk averse tendencies. Individual decisions are not based on objective probabilities of outcomes, but on subjective probabilities that depend on outcome desirability. Unrealistically pessimistic subjects assign lower probabilities (than the group average) to the desired outcomes, while unrealistically optimistic subjects assign higher probabilities (than the group average) to the desired outcomes. Experiment was conducted in order to test the presumption that there's a relation between unrealistic optimism and decision-making under risk. We expected optimists to be risk seeking, and pessimist to be risk averse. We also expected such cognitive tendencies, if they should become manifest, to be framing effect resistant. Unrealistic optimism scale was applied, followed by the questionnaire composed of tasks of decision-making under risk. Results within the whole sample, and results of afterwards extracted groups of pessimists and optimists both revealed dominant risk seeking tendency that is resistant to the influence of subjective probabilities as well as to the influence of frame in which the outcome is presented.

scholarly journals Normative and descriptive theories of decision making under risk

2014 ◽  
Vol 57 (4) ◽  
pp. 25-50 ◽  
Author(s):  
Kaja Damnjanovic ◽  
Ivana Jankovic
Keyword(s):  
Decision Making ◽  
Expected Utility ◽  
Utility Theory ◽  
Developmental Stages ◽  
Expected Utility Theory ◽  
Decision Making Process ◽  
Decision Making Under Risk ◽  
Von Neumann ◽  
Basic Concepts ◽  
Descriptive Theories

The approaches to the decision making process are typically either normative or descriptive. We sketch a historical development of the decision theory, starting with concept of utility that was first introduced by Daniel Bernoulli and then explaining the basic concepts of von Neumann and Morgenstern?s normative expected utility theory (including the basic axioms of rationality). Then we present the descriptively oriented prospect theory of Kahneman and Tversky as a critique of the expected utility theory. We compare these theories and conclude that their historical sequence captures the sequence of the developmental stages of the decision-making process itself. However, normative and descriptive theories are not mutually exclusive.

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