12 votes

Experiments contradicting the expected utility model

this paper http://else.econ.ucl.ac.uk/papers/uploaded/243.pdf (Choi 2007) has a nice state of the art experiment that deals with rationality and expected utility is a special case of it. In general ...
user avatar
  • 1,373
12 votes
Accepted

Continuity Axiom in Expected Utility Theory

It is. Prior to continuity, which is a property of the preference relation, the preference relation $\succsim$ itself has been defined to be a binary relation that is characterized by transitivity, ...
user avatar
11 votes

What is the consensus (if any) on Peters "The ergodicity problem in economics" (2019)?

Well there is no opinion poll among economists on specifically this problem, but what can be judged from reaction of economists the consensus is that the Ole Peters paper is misguided and irrelevant ...
user avatar
  • 41.5k
9 votes
Accepted

Preference over lotteries without independence axiom

No, not necessarily. Without the independence axiom (or something else to replace it) there is not much you can infer about preferences over (non-degenerate) lotteries from knowing preferences over ...
user avatar
9 votes
Accepted

Intuition behind risk premium

The name for the amount $56.25 is certainty equivalent. The expected utility for the individual from taking the bet is calculated as follows: $$E[U]=\frac12U(100+125)+\frac12U(100-100)=75$$ Suppose ...
user avatar
  • 14.3k
9 votes

Experiments contradicting the expected utility model

Adding to the list of paradoxes, consider Machina's paradox. It is described in Mas-Colell, Whinston and Green's Microeconomic Theory. A person prefers a trip to Paris to watching a television ...
user avatar
  • 2,167
9 votes
Accepted

Risk Premium in the Expected Utility Theory

Is there any (economic) rational for the first-order expansion of the RHS? And for its different neighborhood evaluation? As for your first question: This is a purely mathematical tactic in order to ...
user avatar
9 votes

An agent's expected utility depends only on mean and variance

In order to understand this problem, I will work through the generic case. Say that a user had generalized quadratic (Bernoulli) utility, similar to your problem: $$u(x) = \beta x^2 + \gamma x$$ and ...
user avatar
  • 6,409
8 votes
Accepted

Time costs and the St. Petersburg paradox

Consider the version of the paradox from Wikipedia: A casino offers a game of chance for a single player in which a fair coin is tossed at each stage. The pot starts at 2 dollars and is doubled ...
user avatar
  • 16.6k
8 votes
Accepted

Current knowledge about the empirics of consumer theory

The primary literature concerned with this type of question (at least where classical results break down) is behavioral economics. There's a great general compilation of papers put together by the ...
user avatar
  • 1,040
8 votes
Accepted

An agent's expected utility depends only on mean and variance

\begin{eqnarray*} \displaystyle U(L) & = &\sum_{s=1}^{S}\pi_s U(Y_s) = \sum_{s=1}^{S} \left(-\frac{1}{2}\pi_s(\alpha - Y_s)^2\right) = -\frac{1}{2}\sum_{s=1}^{S} \left(\pi_s(\alpha^2 + Y_s^2-2\...
user avatar
  • 4,417
7 votes
Accepted

Envelope Paradox

Here is an "expected utility maximization/ game theoretic" approach to the matter (with a dash of set-theoretic probability). In such a framework, the answers appear clear. PREMISES We are told in ...
user avatar
7 votes
Accepted

Meaning of $dF(z)$ in expected utility framework

Not all cdf’s have a density function, (for example if $F$ is not differentiable). However, when they do have a density, the notation $dF(z)$ is equivalent to $f(z)dz$. When performing integrals. ...
user avatar
  • 4,138
6 votes

What are different ways of specifying utility and decision making?

I'm somewhat surprised that no one has linked to this paper: Backus, Routledge, and Zin (2004) Exotic Preferences for Macroeconomists (this version has some fixed typos, vs the NBER print). Their ...
user avatar
  • 1,048
6 votes

Can the Machina Paradox be solved by expanding the choice set?

No, I would not say that this resolves the Machina paradox, because it is exactly the same as the Machina paradox: the paradox does indeed require from you to look at the three possible outcomes. The ...
user avatar
6 votes

What are different ways of specifying utility and decision making?

This won't get at individual choice, but how about evolutionary approaches? Perhaps this isn't what you are looking for, but one way to model decisions is to wander from the rational paradigm entirely....
user avatar
  • 2,167
6 votes
Accepted

Does risk aversion cause diminishing marginal utility, or vice versa?

I think I've found an answer to my question, in this excerpt from Nobel laureate John C. Harsanyi's 1994 paper "Normative validity and meaning of von neumann-morgenstern utilities", presented at the ...
user avatar
6 votes

How does expected utility theory treat losses?

Gains and losses presuppose a reference point, which is not a feature in standard expected utility theory. In this theory, the only argument in the utility over wealth is $w$, the absolute level of ...
user avatar
  • 14.3k
6 votes

What is the consensus (if any) on Peters "The ergodicity problem in economics" (2019)?

Junior econ professor here. I saw Ole Peter's work and I was intrigued, so I actually looked into it to see if there was something original/insightful for me to learn. I even run a little simulation ...
user avatar
  • 658
6 votes

What is the consensus (if any) on Peters "The ergodicity problem in economics" (2019)?

I’am the guy who wrote the short note that was mentioned in the original question. You can reach the note here. https://osf.io/preprints/socarxiv/axkfg/ I got interested in Peter's paper because of my ...
user avatar
6 votes

Most utility functions under risk and uncertainty generalizes expected utility. What is deadly wrong if a model does not include EU as special case?

Many people accept the axiomatizations of expected utility as normatively appealing, especially in contexts of pure risk. For people with this view, rational decision-makers should behave in ...
user avatar
5 votes

Does risk aversion cause diminishing marginal utility, or vice versa?

The utility function is a representation of preferences, which are traditionally inferred from choices. Preferences come before utility. I would not call the connection between utility and preferences ...
user avatar
5 votes

Reverse auction formula

A first price standard and reverse auction are formally equivalent to each other, and the same method can be used to solve both: First Price Auction In a first price auction, $n$ bidders choose ...
user avatar
  • 16.6k
5 votes

Experiments contradicting the expected utility model

Following @Pburg answer and the subsequent discussion in the comments, I wanted to post an alternative Machina Paradox I thought of. Although it might be less pervasive in real life, it seems stronger ...
user avatar
5 votes

Can the Machina Paradox be solved by expanding the choice set?

I think you are correct that this solves the Machina Paradox but I am not sure I would associate your reformulation of the model with the idea of state-dependent utility. State-dependent utility is ...
user avatar
5 votes

Will high computing power substitute the certainty-equivalence assumption?

This is perhaps a good opportunity to point out that the "certainty equivalence" concept means one thing in microeconomics/choice under uncertainty theory, while it means something different in ...
user avatar
5 votes
Accepted

Why is the risk premium always positive for risk averse individuals?

Suppose that the vector $W=\left(w_1,w_2,\dots,w_n\right)$ represents wealth in $n$ possible states. In addition, assume the probability of each state occurring is represented by the vector $\pi=\left(...
user avatar
5 votes
Accepted

Who is the first one to equate "rational" with "complete and transitive preference"?

As pointed in the comments this was done by Ragnar Frisch. At least Barten and Böhm. (1982) as well as Johansen (1969) attribute these axioms to one of these two publications: Frisch, Ragnar (...
user avatar
  • 41.5k
5 votes
Accepted

Expected utility theory (Lottery notation)

$$ \left(\frac{2}{100} \cdot 1000 \oplus \frac{98}{100}\cdot 0\right) $$ is the lottery where you get $1000$ with probability $2/100$ and $0$ with probability $98/100$. The expression $$ 20 \sim \left(...
user avatar
  • 8,737
4 votes

Experiments contradicting the expected utility model

Picking up my comment under this answer. One striking issue relevant to decisions not captured by expected utility is the framing effect discussed by Tversky and Kahneman (1981) and others. In their ...
user avatar
  • 5,090

Only top scored, non community-wiki answers of a minimum length are eligible