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2017 | OriginalPaper | Buchkapitel

3. Economic Behavior Under Uncertainty

verfasst von : Masao Ogaki, Saori C. Tanaka

Erschienen in: Behavioral Economics

Verlag: Springer Singapore

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Abstract

The chapter explains the expected utility hypothesis as a useful theory of decisions under uncertainty in traditional economics. There have been paradoxes, found in experiments and hypothetical surveys that cannot possibly be explained by the expected utility hypothesis.

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An example of detailed explanation of expected utility is in Gilboa (2009).

A real valued function X with the domain A assigns a unique real number X(a) to each member a of A. For a random variable, we often use a notation with a subscript X_a for X(a).

See Appendix 1 for the relationship between preferences for lotteries and their expected utility.

Mathematically, a real-valued function \(u\left( z \right)\) is a concave function if \(tu\left( x \right) + \left( {1 - t} \right)u\left( y \right) \le (u\left( {tx + \left( {1 - t} \right)y} \right)\) for any two points x and y in the domain and for any real number t such that \(0 \le t \le 1\).

Mathematically, if \(- u\left( z \right)\) is a concave function, then \(u\left( z \right)\) is a convex function.

Because Hansen and Singleton (1982) used a multi-period model, the condition is a Euler equation explained in Chap. 6.

This section explains the most famous choice problem even though Allais (1953) gave other examples.

Allais used huge amounts of prize money in his example. Not only in experiments in which hypothetical huge amounts were used, but also in experiments with much smaller amounts of prize money that are actually paid to participants, many people make choices that support the Allais paradox. Here, “many” does not necessarily mean “the majority”.

There are models that express decisions under temptations that are different from the GP framework. For example, the tough-love model introduced in Chap. 9 can be interpreted as a model of values and temptation.

This is also part of Sakai’s (1982) Proposition 5.1.

This is also part of Sakai’s (1982) Proposition 5.3.

This is also part of Sakai’s (1982) Proposition 5.1.

This is also part of Sakai’s (1982) Proposition 5.3.

Allais, M. (1953). Le comportement de 1’Home rationnel devant le risque: Critique des postulats et Axiomes de l’Ecole Americaine. Econometrica, 21(4), 503–546. CrossRef

Arrow, K. J. (1965). Aspects of the theory of risk-bearing, Yrjo Jahnssonin Saatio.

Barsky, R., Juster, F., Kimball, M., & Shapiro, M. (1997). Preference parameters and behavioral heterogeneity: An experimental approach in the health and retirement survey. Quarterly Journal of Economics, 537–579.

Camerer, C. (1995). Individual decision making. In J. H Kagel & A. E. Roth (Eds.), Handbook of experimental economics. Princeton University Press.

Ellsberg, D. (1961). Risk, ambiguity, and the savage axioms. Quarterly Journal of Economics, 75(4), 643–669.CrossRef

Friend, I., & Blume, M. (1975). The demand for risky assets. American Economic Review, 65(5), 900–922.

Gilboa, I., & Schmeidler, D. (1989). Maxmin expected utility with non-unique prior. Journal of Mathematical Economics, 18(2), 141–153.CrossRef

Gilboa, I. (2009). Theory of decision under uncertainty. New York: Cambridge University Press.CrossRef

Gul, F., & Pesendorfer, W. (2001). Temptation and self-control. Econometrica, 69(6), 1403–1435.CrossRef

Hansen, L. P., & Sargent, T. J. (2001). Robust control and model uncertainty. American Economic Review, 91(2), 60–66.CrossRef

Hansen, L. P., & Singleton, K. (1982). Generalized instrumental variables estimation of nonlinear rational expectations models. Econometrica, 50, 1269–1286.CrossRef

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

Noor, J., & Takeoka, N. (2015). Menu-dependent self-control. Journal of Mathematical Economics, 61, 1–20.CrossRef

Ogaki, M., & Zhang, Q. (2001). Decreasing risk aversion and tests of risk sharing. Econometrica, 69, 515–526.CrossRef

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Sakai, Y. (1982). Fukakujitsusei no Keizaigaku (Economics under Uncertainty). Tokyo: Yuuhikaku.

Titel: Economic Behavior Under Uncertainty
verfasst von: Masao Ogaki
Saori C. Tanaka
Verlag: Springer Singapore
Buch: Behavioral Economics
Print ISBN: 978-981-10-6438-8

Electronic ISBN: 978-981-10-6439-5

Copyright-Jahr: 2017
DOI: https://doi.org/10.1007/978-981-10-6439-5_3

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