EUT and Anomalies created 2010.01.17

EUT and Anomalies created 2010.01.17 - Expected Utility...

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Expected Utility Model, Anomalies, and Developments in Non- Expected Utility Theory Starmer (2000)
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Decision Making Under Risk and Uncertainty How people choose among uncertain outcomes? Instead of consumption bundles we compare prospects A prospect can be described as: For example: How much should you pay to play a gamble? Expected value? St. Petersburg game EU instead of EV Example:
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Expected Utility Theory
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Expected Utility Theory Possible to elicit people’s vN-M utility function?
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Implications of EUT in Triangle Diagram p 3 p 1 0 1 1
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EUT in Triangle Diagram
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EUT in Triangle Diagram
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Linearity in Probabilities
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EU hypothesis could be derived from a set of appealing axioms on preferences (von Neumann Morgenstern) Axioms can be justified as sound principles of rational choice, therefore they provide grounds for interpreting EUT normatively (how people should choose) What are these axioms? Ordering (completeness and transitivity)
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This note was uploaded on 04/15/2011 for the course ECON 73-348 taught by Professor Hafalir during the Spring '11 term at Carnegie Mellon.

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EUT and Anomalies created 2010.01.17 - Expected Utility...

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