ASPIRATION LEVEL, PROBABILITY OF SUCCESS AND FAILURE, AND EXPECTED UTILITY

Aspiration levels are a relevant aspect of decision making. We develop a model that includes the overall probabilities of success and failure relative to the aspiration level into an expected utility representation. This turns out to be equivalent to expected utility with a discontinuous utility fun...

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Bibliographic Details
Published in:International economic review (Philadelphia) 2008-05, Vol.49 (2), p.683-700
Main Authors: Diecidue, Enrico, Van De Ven, Jeroen
Format: Article
Language:English
Subjects:
Behavioural economics
Decision making
Decision theory
Economic models
Economic uncertainty
Economic utility
Expected utility
Loss aversion
Lotteries
Preferences
Probabilities
Prospect theory
Risk aversion
Studies
Success
Utility functions
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Summary:Aspiration levels are a relevant aspect of decision making. We develop a model that includes the overall probabilities of success and failure relative to the aspiration level into an expected utility representation. This turns out to be equivalent to expected utility with a discontinuous utility function. We give a behavioral foundation to the proposed model and provide conditions to determine the relative weights of the overall probabilities of success and failure. An aspiration level reinforces loss aversion, can account for simultaneous risk-averse and risk-seeking behavior, and can explain choices violating the mean-variance approach.
ISSN:0020-6598
1468-2354
DOI:10.1111/j.1468-2354.2008.00494.x