Reexamination of Allais' Paradox, Prospect Theory, and Expected Utility Theory

The axioms of von-Neumann and Morgenstern's utility theory are not contradicted by experiments if the domain of outcomes is constructed properly. Preferences over outcomes take into account issues of regret with respect to alternative outcomes, and surprise with respect to prior probabilities of outcomes. Utilities can be derived as fixed points of a relations between the intrinsic value of an outcome and the money-equivalent value of a probability distribution over outcomes.

By: Nimrod Megiddo

Published in: RJ10493 in 2011


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