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Generalized Expected Utility Theory : The Rank-Dependent Model - John Quiggin

Generalized Expected Utility Theory

The Rank-Dependent Model


Published: 31st December 1992
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Economic analysis of choice under uncertainty has been dominated by the expected utility (EU) model, yet the EU model has never been without critics. Psychologists accumulated evidence that individual choices under uncertainty were inconsistent with the predictions of the EU model. Applied work in areas such as finance was dominated by the simpler mean-variance analysis. In the 1980s this skepticism was dispelled as a number of generalizations of EU were proposed, most of which were capable of explaining evidence inconsistent with EU, while preserving transitivity and dominance.
Generalized expected utility is now a flourishing subfield of economics, with dozens of competing models and considerable literature exploring their theoretical properties and comparing their empirical performance. But the EU model remains the principal tool for the analysis of choice under uncertainty. There is a view that generalized models are too difficult to handle or incapable of generating sharp results. This creates a need to show that the new models can be used in the kinds of economic analysis for which EU has been used, and that they can yield new and interesting results.
This book meets this need by describing one of the most popular generalized models -- the rank-dependent expected utility model (RDEU), also known as anticipated utility, EU with rank-dependent preferences, the dual theory of choice under uncertainty, and simply as rank-dependent utility. As the many names indicate, the model has been approached in many ways by many scientists and for this reason, consideration of a single model sheds light on many of the concerns that have motivated the development of generalized utility models.
The popularity of the RDEU model rests on its simplicity and tractability. The standard tools of analysis developed for EU theory may be applied to the RDEU model, but since RDEU admits behavior inconsistent with EU, the field of potential applications is widened. As such, the RDEU model is not as much a competitor to EU as an extension based on less restrictive assumptions.

The Expected Utility Model
Uncertaintyp. 3
The Nature of Uncertainty
Descriptive and Normative Models
Scientific Research Programs
Backgroundp. 7
EU Theory - History
EU Theory - An Informal Discussion
Notation - The Discrete Case
Notation - The General Case
EU Theoryp. 17
The EU Functional
EU Axioms
Risk Aversion in EU Theory
Stochastic Dominance
Risk Preference in EU Theory
Applications of EU Theory
The General Control Problem
Appendixp. 33
The Challenge to EU Theoryp. 37
The Allais Problem
The Common Ratio Effect
Preference Reversal
Construction of Utility Functions
Probability Weighting
Prospect Theory and Subjectively Weighted Utility
The Rank-Dependent Model
Rank-Dependent Expected Utility - An Outlinep. 55
The Development of RDEU Theory
The RDEU Model
The Transformation Function
RDEU - Probability Weighting Interpretation
The Dual Approach
The Allais Model
RDEU and Ambiguity
RDEU as a Natural Extension
Risk Aversion in RDEU Theoryp. 75
The Correspondence Principle
Pessimism and RDEU Risk Aversion
First and Second Order Risk Aversion
Risk Premiums and Coefficients of Risk Aversion
An Alternative Definition of Increasing Risk
The Rothschild-Stiglitz Theory of Increasing Risk
Risk Seeking Behavior
Comparative Statics for RDEU Theoryp. 91
Comparative Static Problems
Extension Methods
The Extension to RDEU
Risk Aversion, Risk Seeking and Comparative Statics
Monotone Spreads and Comparative Risk Aversion
Comparative Risk Aversion in RDEU
Risk Seeking and Lottery Designp. 105
Lotteries with a Single Prize
The General Case
Evidence from observed lottery designs
Racetrack Betting
Further Properties of the Model
Some Normative Properties of RDEUp. 117
Quasiconcavity, Quasiconvexity and Betweenness
Dynamic Consistency
RDEU and Information
RDEU and Experimental Evidencep. 127
The Experimental Approach
The Allais Problem
The Common Ratio Effect
Ambiguity and Reduction of Compound Lotteries
Preference Reversal
The Recent Empirical Evidence on RDEU
Estimating a Functional Form
Axiomatic Approaches to RDEUp. 145
The Probability Weighting Approach
The Dual Approach
Ordinal Independence and Measure Representation
Trade-Off Consistency
The Reduction of Compound Lotteries Axiom
Ordinally Independent Generalizations
Cumulative Prospect Theory
The Space of Outcomes
Appendix - Notes on the Original Axiomatization of RDEUp. 159
Generalized Expected Utility Theory
Generalized Smooth Utility and RDEUp. 163
The Model
Comparative Statics
RDEU and Generalized Smooth Preferences
Risk Seeking
Stochastic Dominance and Independence Rulesp. 171
Dominance Rules
Independence in RDEU
Betweenness Rules
Extensionsp. 183
Social Welfare Functions
Constitutional Choice
Choice over Time
Time and Uncertainty
Framing and Coding
Referencesp. 195
Index of Namesp. 203
Topic Indexp. 207
Table of Contents provided by Blackwell. All Rights Reserved.

ISBN: 9780792393023
ISBN-10: 0792393023
Audience: Professional
Format: Hardcover
Language: English
Number Of Pages: 208
Published: 31st December 1992
Publisher: Springer
Country of Publication: NL
Dimensions (cm): 23.5 x 15.88  x 1.91
Weight (kg): 0.51