Target-Adjusted Utility Functions and Expected-Utility Paradoxes

• 成果类型: Article
• 署名作者: Schneider, Mark; Day, Robert
• 署名单位: Chapman University System; Chapman University; University of Connecticut
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2016.2588
• 发表日期: 2018
• 页码: 271-287
• 关键词: Downside risk; prospect theory; Allais paradox; fourfold pattern

摘要

Experimental tests of expected-utility theory (EU) have accumulated empirical observations in which the predictions of EU are systematically violated. The cumulative prospect theory (CPT) explains violations such as the Allais paradoxes and fourfold pattern of risk attitudes as resulting from nonlinear probability transformations. Here we show that the classical paradoxes for decisions under risk can be explained with preferences that are linear in probabilities for any choice set and that maximize an expectedutility function with respect to an endogenous target return. We introduce the maximin payoff as a plausible and even natural target return from a choice set and show that the resulting target-adjusted utility (TAU) model explains additional empirical observations such as the scale dependence of the Allais paradox that cannot be explained by standard specifications of CPT. Further, using data from three prominent laboratory experiments, we find that TAU is effective in explaining observed behaviors.