On the statistical foundations of non-linear utility theory: The case of status quo-dependent preferences

Gebhard Geiger

doi:10.1016/S0377-2217(01)00079-0

On the statistical foundations of non-linear utility theory: The case of status quo-dependent preferences

Gebhard Geiger

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8 Scopus citations

Abstract

An account of non-expected utility is given which resumes concepts of μ-σ-analysis from statistical decision theory and combines them with standard principles of preference theory such as weak order, continuity and stochastic dominance. A three-parameter family of probability-dependent utility functions is specified, which is governed by the decision maker's aspiration level, distribution of present wealth, or status quo, and discount parameter for future risks. The approach offers a simple resolution of the Allais Paradox and explains basic patterns of probability-dependent risk attitudes arising in theoretical and applied decision analysis.

Original language	English
Pages (from-to)	449-465
Number of pages	17
Journal	European Journal of Operational Research
Volume	136
Issue number	2
DOIs	https://doi.org/10.1016/S0377-2217(01)00079-0
State	Published - 16 Jan 2002

Keywords

Decision analysis
Generalised expected utility
Non-linear preference theory
Risk analysis
Status quo-dependent decision making
Utility theory

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10.1016/S0377-2217(01)00079-0

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AB - An account of non-expected utility is given which resumes concepts of μ-σ-analysis from statistical decision theory and combines them with standard principles of preference theory such as weak order, continuity and stochastic dominance. A three-parameter family of probability-dependent utility functions is specified, which is governed by the decision maker's aspiration level, distribution of present wealth, or status quo, and discount parameter for future risks. The approach offers a simple resolution of the Allais Paradox and explains basic patterns of probability-dependent risk attitudes arising in theoretical and applied decision analysis.

KW - Decision analysis

KW - Generalised expected utility

KW - Non-linear preference theory

KW - Risk analysis

KW - Status quo-dependent decision making

KW - Utility theory

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On the statistical foundations of non-linear utility theory: The case of status quo-dependent preferences

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Keywords

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