Abstract
Most of the economic and finance models that deal with investment decision making under uncertainty are based on the expected utility paradigm. However, experimental studies have shown that subjects often behave in a manner that runs counter to expected utility maximization. Such inconsistencies have been shown to be mainly due to violation of the independent axiom (called also the interchangeability axiom, see Chapter 2). In this chapter, we discuss some of the violations of the expected utility model (for a fuller account, see Machina, [1982 and 1983]1), and review the modified of the expected utility theory, the generalized expected utility or non-expected utility theory, as well as the competing models that have been developed in order to avoid these violations.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsPreview
Unable to display preview. Download preview PDF.
Notes
Machina, Mark A., “‘Expected Utility’ Analysis Without Independent Axiom,” Econometrica, 50, 1982, pp. 270–323.
Machina, M.A., “Generalized Expected Utility Analysis and the Nature of Observed Violations of the Independence Axiom, in Stigum, B., and Wenstøph, F. (eds.) Foundation of Utility and Risk with Applications, Reidel, Dordrecht, Holland, 1983.
Fishburn, P.C., “Nontransitive Measureable Utility,” Journal of Math. Psychology, 26, 1982, pp. 31–67.
Mosteller, F., and Nogee, P., “An Experimental Measurement of Utility,” Journal of Political Economy, 59, October 1951, pp. 371–404.
Edwards, W., “Probability Preferences in Gambling,” American Journal of Psychology, 66, 1953, pp. 349–364.
Edwards W., “Probability Preferences Among Bets with Differing Expected Values,” American Journal of Psychology, 67, 1954, pp. 56–67.
Yaari, M, “The Dual Theory of Choice Under Risk,” Econometrica, 55, 1987, pp. 95–115.
Teversky, A. and D. Kahaneman, “Advances in Prospect Theory: Cumulative Representation of Uncertainty,” Journal of Risk and Uncertainty, 5, 1992, pp. 297–323.
Quiggin, J., Generalized Expected Utility Theory, The Rank Dependent Model, Kluwer Academic Publishers, Boston, 1993.
Kahneman, D. and Tversky, A., “Prospect Theory: An Analysis of Decision Under Risk,” Econometrica, 47, 1979, pp. 263–291.
Thaler, R.H., and E.J. Johnson, “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choices,” Management Science, 36, 1990, pp. 643–660.
The proof, as the proofs of the SD criteria, holds also for the unbounded case (see Hanoch and Levy, Review of Economic Studies, 36, 1969, pp. 335–346).
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 1998 Springer Science+Business Media New York
About this chapter
Cite this chapter
Levy, H. (1998). Non-Expected Utility and Stochastic Dominance. In: Stochastic Dominance. Studies in Risk and Uncertainty, vol 12. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-2840-8_13
Download citation
DOI: https://doi.org/10.1007/978-1-4757-2840-8_13
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4757-2842-2
Online ISBN: 978-1-4757-2840-8
eBook Packages: Springer Book Archive