Consumption, Savings and Asset Returns with Non-Expected Utility

  • Larry G. Epstein


Over the last dozen years, the standard models of decision making under risk and uncertainty have come under renewed scrutiny because of their failure to describe choices observed in experimental settings; the Allais and Ellsberg paradoxes are the best known instances of descriptive failures of the (subjective) expected utility model. In addition, a number of generalizations of the expected utility model have been developed. These ‘nonexpected utility’ theories have proven useful in several ways. First, they have provided models of preference that can ‘explain’, or at least accommodate the cited experimental evidence. Equally important, they have stimulated new experimental tests of decision making in laboratory settings that should help to provide further insights into the way in which subjects make choices. In addition, they have provided a deeper understanding of the expected utility model, both at an axiomatic level and at the more practical level of clarifying why it is that the expected utility model has proven so tractable in modeling applications.


Risk Aversion Euler Equation Asset Price Asset Return Certainty Equivalent 
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© Springer Science+Business Media New York 1999

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  • Larry G. Epstein

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