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2017 | OriginalPaper | Chapter

3. Economic Behavior Under Uncertainty

Authors : Masao Ogaki, Saori C. Tanaka

Published in: Behavioral Economics

Publisher: 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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Appendix
Available only for authorised users
Footnotes
1
An example of detailed explanation of expected utility is in Gilboa (2009).
 
2
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 Xa for X(a).
 
3
See Appendix 1 for the relationship between preferences for lotteries and their expected utility.
 
4
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 \(0 \le t \le 1\).
 
5
Mathematically, if \(- u\left( z \right)\) is a concave function, then \(u\left( z \right)\) is a convex function.
 
6
Because Hansen and Singleton (1982) used a multi-period model, the condition is a Euler equation explained in Chap. 6.
 
7
This section explains the most famous choice problem even though Allais (1953) gave other examples.
 
8
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”.
 
9
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.
 
10
This is also part of Sakai’s (1982) Proposition 5.1.
 
11
This is also part of Sakai’s (1982) Proposition 5.3.
 
12
This is also part of Sakai’s (1982) Proposition 5.1.
 
13
This is also part of Sakai’s (1982) Proposition 5.3.
 
Literature
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Metadata
Title
Economic Behavior Under Uncertainty
Authors
Masao Ogaki
Saori C. Tanaka
Copyright Year
2017
Publisher
Springer Singapore
DOI
https://doi.org/10.1007/978-981-10-6439-5_3

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