Skip to main content
SpringerLink
Log in

Non-expected Utility Theory

  • Reference work entry
  • First Online:
The New Palgrave Dictionary of Economics

  • 46 Accesses

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.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 6,499.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD 8,499.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Bibliography

  • 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.

    Article  Google Scholar 

  • Allen, B. 1987. Smooth preferences and the local expected utility hypothesis. Journal of Economic Theory 41: 340–355.

    Article  Google Scholar 

  • Arrow, K. 1965. Aspects of the theory of risk bearing. Yrjö Jahnsson Säätiö: Helsinki.

    Google Scholar 

  • Battalio, R., J. Kagel, and D. Macdonald. 1985. Animals’ choices over uncertain outcomes. American Economic Review 75: 597–613.

    Google Scholar 

  • Becker, S., and F. Brownson. 1964. What price ambiguity? Or the role of ambiguity in decision-making. Journal of Political Economy 72: 62–73.

    Article  Google Scholar 

  • Bell, D. 1985. Disappointment in decision making under uncertainty. Operations Research 33: 1–27.

    Article  Google Scholar 

  • 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 

  • Camerer, C. 1989. An experimental test of several generalized utility theories. Journal of Risk and Uncertainty 2: 61–104.

    Article  Google Scholar 

  • Camerer, C., and M. Weber. 1992. Recent developments in modeling preferences: Uncertainty and ambiguity. Journal of Risk and Uncertainty 5: 325–370.

    Article  Google Scholar 

  • Carlin, F. 1990. Is the Allais Paradox robust to a seemingly trivial change of frame? Economics Letters 34: 241–244.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Chew, S., L. Epstein, and U. Segal. 1991. Mixture symmetry and quadratic utility. Econometrica 59: 139–163.

    Article  Google Scholar 

  • Chew, S., L. Epstein, and I. Zilcha. 1988. A correspondence theorem between expected utility and smooth utility. Journal of Economic Theory 46: 186–193.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Chew, S., and N. Nishimura. 1992. Differentiability, comparative statics, and non-expected utility preferences. Journal of Economic Theory 56: 294–312.

    Article  Google Scholar 

  • Chew, S., and W. Waller. 1986. Empirical tests of weighted utility theory. Journal of Mathematical Psychology 30: 55–72.

    Article  Google Scholar 

  • Dekel, E. 1989. Asset demands without the independence axiom. Econometrica 57: 163–169.

    Article  Google Scholar 

  • Edwards, W. 1955. The prediction of decisions among bets. Journal of Experimental Psychology 50: 201–214.

    Article  Google Scholar 

  • Edwards, W. 1962. Subjective probabilities inferred from decisions. Psychological Review 69: 109–135.

    Article  Google Scholar 

  • Ellsberg, D. 1961. Risk, ambiguity, and the Savage axioms. Quarterly Journal of Economics 75: 643–669.

    Article  Google Scholar 

  • Epstein, L. 1999. A definition of uncertainty aversion. Review of Economic Studies 66: 579–608.

    Article  Google Scholar 

  • Friedman, M., and L. Savage. 1948. The utility analysis of choices involving risk. Journal of Political Economy 56: 279–304.

    Article  Google Scholar 

  • Gilboa, I. 1987. Expected utility with purely subjective non-additive probabilities. Journal of Mathematical Economics 16: 65–88.

    Article  Google Scholar 

  • Gilboa, I., and D. Schmeidler. 1989. Maxmin expected utility with a non-unique prior. Journal of Mathematical Economics 18: 141–153.

    Article  Google Scholar 

  • 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 

  • Green, J., and B. Jullien. 1988. Ordinal independence in non-linear utility theory. Journal of Risk and Uncertainty 1: 355–387.

    Article  Google Scholar 

  • 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 

  • Hershey, J., H. Kunreuther, and P. Schoemaker. 1982. Sources of Bias in assessment procedures for utility functions. Management Science 28: 936–954.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Hershey, J., and P. Schoemaker. 1985. Probability versus certainty equivalence methods in utility measurement: Are they equivalent? Management Science 31: 1213–1231.

    Article  Google Scholar 

  • Hey, J. 1984. The economics of optimism and pessimism: A definition and some applications. Kyklos 37: 181–205.

    Article  Google Scholar 

  • Kahneman, D., and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47: 263–291.

    Article  Google Scholar 

  • Kahneman, D., and A. Tversky. 1982. The psychology of preferences. Scientific American 246: 160–173.

    Article  Google Scholar 

  • Kahneman, D., and A. Tversky. 1984. Choices, values and frames. American Psychologist 39: 341–350.

    Article  Google Scholar 

  • Karmarkar, U. 1978. Subjectively weighted utility: A descriptive extension of the expected utility model. Organizational Behavior and Human Performance 21: 61–72.

    Article  Google Scholar 

  • Karmarkar, U. 1979. Subjectively weighted utility and the Allais Paradox. Organizational Behavior and Human Performance 24: 67–72.

    Article  Google Scholar 

  • Karni, E. 1987. Generalized expected utility analysis of risk aversion with state- dependent preferences. International Economic Review 28: 229–240.

    Article  Google Scholar 

  • Karni, E. 1989. Generalized expected utility analysis of multivariate risk aversion. International Economic Review 30: 297–305.

    Article  Google Scholar 

  • Keller, L. 1985. The effects of problem representation on the sure-thing and substitution principles. Management Science 31: 738–751.

    Article  Google Scholar 

  • Kelsey, D., and J. Quiggin. 1992. Theories of choice under ignorance and uncertainty. Journal of Economic Surveys 6: 133–153.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Lichtenstein, S., and P. Slovic. 1971. Reversals of preferences between bids and choices in gambling decisions. Journal of Experimental Psychology 89: 46–55.

    Article  Google Scholar 

  • Loomes, G., and R. Sugden. 1982. Regret Theory: An alternative theory of rational choice under uncertainty. Economic Journal 92: 805–824.

    Article  Google Scholar 

  • MacCrimmon, K. 1965. An experimental study of the decision making behavior of business executives. Doctoral dissertation, University of California, Los Angeles.

    Google Scholar 

  • 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 

  • 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 

  • Machina, M. 1982. ‘Expected utility’ analysis without the independence axiom. Econometrica 50: 277–323.

    Article  Google Scholar 

  • 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 

  • Machina, M. 1984. Temporal risk and the nature of induced preferences. Journal of Economic Theory 33: 199–231.

    Article  Google Scholar 

  • Machina, M. 1987. Choice under uncertainty: Problems solved and unsolved. Journal of Economic Perspectives 1(1): 121–154.

    Article  Google Scholar 

  • Machina, M. 1989. Comparative statics and non-expected utility preferences. Journal of Economic Theory 47: 393–405.

    Article  Google Scholar 

  • Machina, M. 1995. Non-expected utility and the robustness of the classical insurance paradigm. Geneva Papers on Risk and Insurance Theory 20: 9–50.

    Article  Google Scholar 

  • Machina, M. 2005. ‘Expected utility/subjective probability’ analysis without the sure-thing principle or probabilistic sophistication. Economic Theory 26: 1–62.

    Article  Google Scholar 

  • Machina, M., and D. Schmeidler. 1992. A more robust definition of subjective probability. Econometrica 60: 745–780.

    Article  Google Scholar 

  • Markowitz, H. 1952. The utility of wealth. Journal of Political Economy 60: 151–158.

    Article  Google Scholar 

  • Marschak, J. 1950. Rational behavior, uncertain prospects, and measurable utility. Econometrica 18: 111–141.

    Article  Google Scholar 

  • Morrison, D. 1967. On the consistency of preferences in Allais’ paradox. Behavioral Science 12: 373–383.

    Article  Google Scholar 

  • Moskowitz, H. 1974. Effects of problem representation and feedback on rational behavior in Allais and Morlat-type problems. Decision Sciences 5: 225–242.

    Article  Google Scholar 

  • 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 

  • Pratt, J. 1964. Risk aversion in the small and in the large. Econometrica 32: 122–136.

    Article  Google Scholar 

  • Quiggin, J. 1982. A theory of anticipated utility. Journal of Economic Behavior and Organization 3: 323–343.

    Article  Google Scholar 

  • Raiffa, H. 1961. Risk, ambiguity, and the Savage axioms: Comment. Quarterly Journal of Economics 75: 690–694.

    Article  Google Scholar 

  • Raiffa, H. 1968. Decision analysis: Introductory lectures on choices under uncertainty. Reading: Addison-Wesley.

    Google Scholar 

  • Rothschild, M., and J. Stiglitz. 1970. Increasing risk: I a definition. Journal of Economic Theory 2: 225–243.

    Article  Google Scholar 

  • Rothschild, M., and J. Stiglitz. 1971. Increasing risk: II its economic consequences. Journal of Economic Theory 3: 66–84.

    Article  Google Scholar 

  • Savage, L. 1954. The foundations of statistics. New York: John Wiley and Sons Revised edn, New York: Dover Publications, 1972.

    Google Scholar 

  • Schlesinger, H. 1997. Insurance demand without the expected utility paradigm. Journal of Risk and Insurance 64: 19–39.

    Article  Google Scholar 

  • Schmeidler, D. 1989. Subjective probability and expected utility without additivity. Econometrica 57: 571–587.

    Article  Google Scholar 

  • Schoemaker, P., and H. Kunreuther. 1979. An experimental study of insurance decisions. Journal of Risk and Insurance 46: 603–618.

    Article  Google Scholar 

  • Segal, U. 1984. Nonlinear decision weights with the independence axiom. Working Paper No. 353, Department of Economics, University of California, Los Angeles.

    Google Scholar 

  • Slovic, P. 1969. Manipulating the attractiveness of a gamble without changing its expected value. Journal of Experimental Psychology 79: 139–145.

    Article  Google Scholar 

  • Slovic, P., B. Fischhoff, and S. Lichtenstein. 1977. Behavioral decision theory. Annual Review of Psychology 28: 1–39.

    Article  Google Scholar 

  • Slovic, P., and A. Tversky. 1974. Who accepts Savage’s axiom? Behavioral Science 19: 368–373.

    Article  Google Scholar 

  • 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.

    Article  Google Scholar 

  • Stigum, B., and F. Wenstøp. Foundations of utility and risk theory with applications. Dordrecht: Reidel.

    Google Scholar 

  • Sugden, R. 1986. New developments in the theory of choice under uncertainty. Bulletin of Economic Research 38: 1–24.

    Article  Google Scholar 

  • Tversky, A. 1975. A critique of expected utility theory: Descriptive and normative considerations. Erkenntnis 9: 163–173.

    Google Scholar 

  • Tversky, A., and D. Kahneman. 1981. The framing of decisions and the psychology of choice. Science 211: 453–458.

    Article  Google Scholar 

  • 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 

  • Wang, T. 1993. Lp-Fréchet differentiable preference and ‘local utility’ analysis. Journal of Economic Theory 61: 139–159.

    Article  Google Scholar 

  • Weber, M., and C. Camerer. 1987. Recent developments in modeling preferences under risk. OR Spektrum 9: 129–151.

    Article  Google Scholar 

  • Yaari, M. 1987. The dual theory of choice under risk. Econometrica 55: 95–115.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. http://link.springer.com/referencework/10.1057/978-1-349-95121-5

    Mark J. Machina

Authors
  1. Mark J. Machina
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Copyright information

© 2018 Macmillan Publishers Ltd.

About this entry

Check for updates. Verify currency and authenticity via CrossMark

Cite this entry

Machina, M.J. (2018). Non-expected Utility Theory. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2558

Download citation

Publish with us

Policies and ethics

Search

Navigation