Correcting expected utility for comparisons between alternative outcomes: A unified parameterization of regret and disappointment
- 241 Downloads
A unified parameterization of an expected utility model corrected for regret and disappointment effects is presented, constrained to conform to a well-known choice pattern, the common consequence effect, a special case of the Allais paradox. For choices subject to regret and disappointment effects to be consistent with this choice pattern, the function that corrects the utility of the obtained outcome has to have a positive second derivative for its regret component and a negative second derivative for its disappointment component. These hypothesized functional forms make predictions about the relative effect that small vs. large differences between obtained and alternative outcomes should have on people’s experiences of regret or disappointment.
KeywordsRegret Disappointment Alternative outcomes
JEL ClassificationD8 D81
The research was supported by an NSF Biocomplexity in the Environment grant (BE-0410348), an NSF Center grant under the Decision Making under Uncertainty Initiative (SES-0345840), and a NOAA Human Dimensions grant (GC04-159). We are grateful to Guillermo Podestá for valuable comments, to Xavier González for corrections to an older version of this article, and to an anonymous reviewer for very insightful and constructive criticism of a previous manuscript which resulted in the present version of this paper.
- Bell, David E. (1985). “Disappointment in Decision Making under Uncertainty,” Operations Research 33(1), 1–27.Google Scholar
- Bernoulli, Daniel. (1738). “Exposition of a New Theory on the Measurement of Risk,” Comentarii Academiae Scientiarum Imperialis Petropolitanae. Translated and reprinted in Econometrica 22 (1954), 23–36.Google Scholar
- Grant, Simon, Atsushi Kajii, and Ben Polak. (2000). “Different Notions of Disappointment Aversion,” Journal of Economic Literature 81, 1–6.Google Scholar
- Inman, J. Jeffrey, James S. Dyer, and Jianmin Jia. (1997). “A Generalized Utility Model of Disappointment and Regret Effects on Post-Choice Valuation,” Marketing Science 16(2), 97–111.Google Scholar
- Loomes, Graham and Robert Sugden. (1986). “Disappointment and Dynamic Consistency in Choice under Uncertainty,” Review of Economic Studies LIII, 271–282.Google Scholar
- Machina, Mark J. (1987). “Choice Under Uncertainty: Problems Solved and Unsolved,” The Journal of Economic Perspectives 1(1), 121–154.Google Scholar
- Schick, Frederic. (1991). Understanding Action. Cambridge, UK: Cambridge University Press.Google Scholar
- Schoemaker, Paul J. (1982). “The Expected Utility Model: Its Variants, Proposes, Evidence and Limitations,” Journal of Economic Literature 20(2), 529–563.Google Scholar
- Starmer, Chris. (2000). “Developments in Non-Expected Utility Theory: The Hunt for Descriptive Theory of Choice under Risk,” Journal of Economic Literature 38, 332–382.Google Scholar