The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Non-expected Utility Theory

  • Mark J. Machina
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2558

Abstract

Beginning with the work of Allais and Edwards in the early 1950s and continuing through the present, psychologists and economists have uncovered a growing body of evidence that individuals do not necessarily conform to many of the key assumptions or predictions of the expected utility model of choice under uncertainty, and seem to depart from this model in systematic and predictable ways. This has led to the development of alternative models of preferences over objectively or subjectively uncertain prospects, which seek to accommodate these systematic departures from the expected utility model while retaining as much of its analytical power as possible.

Keywords

Allais Paradox Allais, M. Ambiguity aversion Asset demand theory Choquet expected utility model Common consequence effect Common ratio effect Comparative statics Ellsberg Paradox Expected utility hypothesis First-order stochastic dominance preference Independence Axiom Insurance Non-expected utility theory Objective vs. subjective uncertainty Regret theory Risk Risk aversion Stochastic dominance Transitivity Uncertainty von Neumann–Morgenstern utility function 
This is a preview of subscription content, log in to check access

Bibliography

  1. Allais, M. 1953. Le comportement de l’homme rationnel devant le risque: Critique des postulats et axiomes de l’Ecole Américaine. Econometrica 21: 503–546.CrossRefGoogle Scholar
  2. Allen, B. 1987. Smooth preferences and the local expected utility hypothesis. Journal of Economic Theory 41: 340–355.CrossRefGoogle Scholar
  3. Arrow, K. 1965. Aspects of the theory of risk bearing. Yrjö Jahnsson Säätiö: Helsinki.Google Scholar
  4. Battalio, R., J. Kagel, and D. Macdonald. 1985. Animals’ choices over uncertain outcomes. American Economic Review 75: 597–613.Google Scholar
  5. Becker, S., and F. Brownson. 1964. What price ambiguity? Or the role of ambiguity in decision-making. Journal of Political Economy 72: 62–73.CrossRefGoogle Scholar
  6. Bell, D. 1985. Disappointment in decision making under uncertainty. Operations Research 33: 1–27.CrossRefGoogle Scholar
  7. Bernoulli, D. 1738. Specimen theoriae novae de mensura sortis. Commentarii academiae scientiarum imperialis petropolitanae. Trans. as Exposition of a new theory on the measurement of risk. Econometrica 22(1954): 23–36.Google Scholar
  8. Camerer, C. 1989. An experimental test of several generalized utility theories. Journal of Risk and Uncertainty 2: 61–104.CrossRefGoogle Scholar
  9. Camerer, C., and M. Weber. 1992. Recent developments in modeling preferences: Uncertainty and ambiguity. Journal of Risk and Uncertainty 5: 325–370.CrossRefGoogle Scholar
  10. Carlin, F. 1990. Is the Allais Paradox robust to a seemingly trivial change of frame? Economics Letters 34: 241–244.CrossRefGoogle Scholar
  11. Chew, S. 1983. A generalization of the quasilinear mean with applications to the measurement of income inequality and decision theory resolving the Allais Paradox. Econometrica 51: 1065–1092.CrossRefGoogle Scholar
  12. Chew, S., L. Epstein, and U. Segal. 1991. Mixture symmetry and quadratic utility. Econometrica 59: 139–163.CrossRefGoogle Scholar
  13. Chew, S., L. Epstein, and I. Zilcha. 1988. A correspondence theorem between expected utility and smooth utility. Journal of Economic Theory 46: 186–193.CrossRefGoogle Scholar
  14. Chew, S., E. Karni, and Z. Safra. 1987. Risk aversion in the theory of expected utility with rank dependent probabilities. Journal of Economic Theory 42: 370–381.CrossRefGoogle Scholar
  15. Chew, S., and N. Nishimura. 1992. Differentiability, comparative statics, and non-expected utility preferences. Journal of Economic Theory 56: 294–312.CrossRefGoogle Scholar
  16. Chew, S., and W. Waller. 1986. Empirical tests of weighted utility theory. Journal of Mathematical Psychology 30: 55–72.CrossRefGoogle Scholar
  17. Dekel, E. 1989. Asset demands without the independence axiom. Econometrica 57: 163–169.CrossRefGoogle Scholar
  18. Edwards, W. 1955. The prediction of decisions among bets. Journal of Experimental Psychology 50: 201–214.CrossRefGoogle Scholar
  19. Edwards, W. 1962. Subjective probabilities inferred from decisions. Psychological Review 69: 109–135.CrossRefGoogle Scholar
  20. Ellsberg, D. 1961. Risk, ambiguity, and the Savage axioms. Quarterly Journal of Economics 75: 643–669.CrossRefGoogle Scholar
  21. Epstein, L. 1999. A definition of uncertainty aversion. Review of Economic Studies 66: 579–608.CrossRefGoogle Scholar
  22. Friedman, M., and L. Savage. 1948. The utility analysis of choices involving risk. Journal of Political Economy 56: 279–304.CrossRefGoogle Scholar
  23. Gilboa, I. 1987. Expected utility with purely subjective non-additive probabilities. Journal of Mathematical Economics 16: 65–88.CrossRefGoogle Scholar
  24. Gilboa, I., and D. Schmeidler. 1989. Maxmin expected utility with a non-unique prior. Journal of Mathematical Economics 18: 141–153.CrossRefGoogle Scholar
  25. Gollier, C. 2000. Optimal insurance design: What can we do without expected utility. In Handbook of insurance, ed. G. Dionne. Boston: Kluwer Academic Publishers.Google Scholar
  26. Green, J., and B. Jullien. 1988. Ordinal independence in non-linear utility theory. Journal of Risk and Uncertainty 1: 355–387.CrossRefGoogle Scholar
  27. Hagen, O. 1979. Towards a positive theory of preferences under risk. In Expected utility hypotheses and the Allais Paradox, ed. M. Allais and O. Hagen. Dordrecht: Reidel.Google Scholar
  28. Hershey, J., H. Kunreuther, and P. Schoemaker. 1982. Sources of Bias in assessment procedures for utility functions. Management Science 28: 936–954.CrossRefGoogle Scholar
  29. Hershey, J., and P. Schoemaker. 1980. Risk-taking and problem context in the domain of losses – An expected utility analysis. Journal of Risk and Insurance 47: 111–132.CrossRefGoogle Scholar
  30. Hershey, J., and P. Schoemaker. 1985. Probability versus certainty equivalence methods in utility measurement: Are they equivalent? Management Science 31: 1213–1231.CrossRefGoogle Scholar
  31. Hey, J. 1984. The economics of optimism and pessimism: A definition and some applications. Kyklos 37: 181–205.CrossRefGoogle Scholar
  32. Kahneman, D., and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47: 263–291.CrossRefGoogle Scholar
  33. Kahneman, D., and A. Tversky. 1982. The psychology of preferences. Scientific American 246: 160–173.CrossRefGoogle Scholar
  34. Kahneman, D., and A. Tversky. 1984. Choices, values and frames. American Psychologist 39: 341–350.CrossRefGoogle Scholar
  35. Karmarkar, U. 1978. Subjectively weighted utility: A descriptive extension of the expected utility model. Organizational Behavior and Human Performance 21: 61–72.CrossRefGoogle Scholar
  36. Karmarkar, U. 1979. Subjectively weighted utility and the Allais Paradox. Organizational Behavior and Human Performance 24: 67–72.CrossRefGoogle Scholar
  37. Karni, E. 1987. Generalized expected utility analysis of risk aversion with state- dependent preferences. International Economic Review 28: 229–240.CrossRefGoogle Scholar
  38. Karni, E. 1989. Generalized expected utility analysis of multivariate risk aversion. International Economic Review 30: 297–305.CrossRefGoogle Scholar
  39. Keller, L. 1985. The effects of problem representation on the sure-thing and substitution principles. Management Science 31: 738–751.CrossRefGoogle Scholar
  40. Kelsey, D., and J. Quiggin. 1992. Theories of choice under ignorance and uncertainty. Journal of Economic Surveys 6: 133–153.CrossRefGoogle Scholar
  41. Konrad, K., and S. Skaperdas. 1993. Self-insurance and self-protection: A nonexpected utility analysis. Geneva Papers on Risk and Insurance Theory 18: 131–146.CrossRefGoogle Scholar
  42. Lichtenstein, S., and P. Slovic. 1971. Reversals of preferences between bids and choices in gambling decisions. Journal of Experimental Psychology 89: 46–55.CrossRefGoogle Scholar
  43. Loomes, G., and R. Sugden. 1982. Regret Theory: An alternative theory of rational choice under uncertainty. Economic Journal 92: 805–824.CrossRefGoogle Scholar
  44. MacCrimmon, K. 1965. An experimental study of the decision making behavior of business executives. Doctoral dissertation, University of California, Los Angeles.Google Scholar
  45. MacCrimmon, K. 1968. Descriptive and normative implications of the decision-theory postulates. In Risk and uncertainty: Proceedings of a conference held by the International Economic Association, ed. K. Borch and J. Mossin. London: Macmillan.Google Scholar
  46. MacCrimmon, K., and S. Larsson. 1979. Utility theory: Axioms versus ‘paradoxes’. In Expected utility hypotheses and the Allais Paradox, ed. M. Allais and O. Hagen. Dordrecht: Reidel.Google Scholar
  47. Machina, M. 1982. ‘Expected utility’ analysis without the independence axiom. Econometrica 50: 277–323.CrossRefGoogle Scholar
  48. Machina, M. 1983. Generalized expected utility analysis and the nature of observed violations of the independence axiom. In Foundations of utility and risk theory with applications, ed. B. Stigum and F. Wenstøp. Dordrecht: Reidel.Google Scholar
  49. Machina, M. 1984. Temporal risk and the nature of induced preferences. Journal of Economic Theory 33: 199–231.CrossRefGoogle Scholar
  50. Machina, M. 1987. Choice under uncertainty: Problems solved and unsolved. Journal of Economic Perspectives 1(1): 121–154.CrossRefGoogle Scholar
  51. Machina, M. 1989. Comparative statics and non-expected utility preferences. Journal of Economic Theory 47: 393–405.CrossRefGoogle Scholar
  52. Machina, M. 1995. Non-expected utility and the robustness of the classical insurance paradigm. Geneva Papers on Risk and Insurance Theory 20: 9–50.CrossRefGoogle Scholar
  53. Machina, M. 2005. ‘Expected utility/subjective probability’ analysis without the sure-thing principle or probabilistic sophistication. Economic Theory 26: 1–62.CrossRefGoogle Scholar
  54. Machina, M., and D. Schmeidler. 1992. A more robust definition of subjective probability. Econometrica 60: 745–780.CrossRefGoogle Scholar
  55. Markowitz, H. 1952. The utility of wealth. Journal of Political Economy 60: 151–158.CrossRefGoogle Scholar
  56. Marschak, J. 1950. Rational behavior, uncertain prospects, and measurable utility. Econometrica 18: 111–141.CrossRefGoogle Scholar
  57. Morrison, D. 1967. On the consistency of preferences in Allais’ paradox. Behavioral Science 12: 373–383.CrossRefGoogle Scholar
  58. Moskowitz, H. 1974. Effects of problem representation and feedback on rational behavior in Allais and Morlat-type problems. Decision Sciences 5: 225–242.CrossRefGoogle Scholar
  59. Múnera, H., and R. de Neufville. 1983. A decision analysis model when the substitution principle is not acceptable. In Foundations of utility and risk theory with applications, ed. B. Stigum and F. Wenstøp. Dordrecht: Reidel.Google Scholar
  60. Pratt, J. 1964. Risk aversion in the small and in the large. Econometrica 32: 122–136.CrossRefGoogle Scholar
  61. Quiggin, J. 1982. A theory of anticipated utility. Journal of Economic Behavior and Organization 3: 323–343.CrossRefGoogle Scholar
  62. Raiffa, H. 1961. Risk, ambiguity, and the Savage axioms: Comment. Quarterly Journal of Economics 75: 690–694.CrossRefGoogle Scholar
  63. Raiffa, H. 1968. Decision analysis: Introductory lectures on choices under uncertainty. Reading: Addison-Wesley.Google Scholar
  64. Rothschild, M., and J. Stiglitz. 1970. Increasing risk: I a definition. Journal of Economic Theory 2: 225–243.CrossRefGoogle Scholar
  65. Rothschild, M., and J. Stiglitz. 1971. Increasing risk: II its economic consequences. Journal of Economic Theory 3: 66–84.CrossRefGoogle Scholar
  66. Savage, L. 1954. The foundations of statistics. New York: John Wiley and Sons Revised edn, New York: Dover Publications, 1972.Google Scholar
  67. Schlesinger, H. 1997. Insurance demand without the expected utility paradigm. Journal of Risk and Insurance 64: 19–39.CrossRefGoogle Scholar
  68. Schmeidler, D. 1989. Subjective probability and expected utility without additivity. Econometrica 57: 571–587.CrossRefGoogle Scholar
  69. Schoemaker, P., and H. Kunreuther. 1979. An experimental study of insurance decisions. Journal of Risk and Insurance 46: 603–618.CrossRefGoogle Scholar
  70. Segal, U. 1984. Nonlinear decision weights with the independence axiom. Working Paper No. 353, Department of Economics, University of California, Los Angeles.Google Scholar
  71. Slovic, P. 1969. Manipulating the attractiveness of a gamble without changing its expected value. Journal of Experimental Psychology 79: 139–145.CrossRefGoogle Scholar
  72. Slovic, P., B. Fischhoff, and S. Lichtenstein. 1977. Behavioral decision theory. Annual Review of Psychology 28: 1–39.CrossRefGoogle Scholar
  73. Slovic, P., and A. Tversky. 1974. Who accepts Savage’s axiom? Behavioral Science 19: 368–373.CrossRefGoogle Scholar
  74. Starmer, C. 2000. Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk. Journal of Economic Literature 38: 332–382.CrossRefGoogle Scholar
  75. Stigum, B., and F. Wenstøp. Foundations of utility and risk theory with applications. Dordrecht: Reidel.Google Scholar
  76. Sugden, R. 1986. New developments in the theory of choice under uncertainty. Bulletin of Economic Research 38: 1–24.CrossRefGoogle Scholar
  77. Tversky, A. 1975. A critique of expected utility theory: Descriptive and normative considerations. Erkenntnis 9: 163–173.Google Scholar
  78. Tversky, A., and D. Kahneman. 1981. The framing of decisions and the psychology of choice. Science 211: 453–458.CrossRefGoogle Scholar
  79. von Neumann, J., and O. Morgenstern. 1944. Theory of games and economic behavior. Princeton: Princeton University Press 2nd edn, 1947; 3rd edn, 1953.Google Scholar
  80. Wang, T. 1993. Lp-Fréchet differentiable preference and ‘local utility’ analysis. Journal of Economic Theory 61: 139–159.CrossRefGoogle Scholar
  81. Weber, M., and C. Camerer. 1987. Recent developments in modeling preferences under risk. OR Spektrum 9: 129–151.CrossRefGoogle Scholar
  82. Yaari, M. 1987. The dual theory of choice under risk. Econometrica 55: 95–115.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Mark J. Machina
    • 1
  1. 1.