William Sjostrom wrote: > > I don't know the evidence on the point, but you are proposing the expected > utility model with risk neutrality.
No, that's not it. I'm not saying people maximize expected earnings. The functional form I'm proposing is the much weaker one that they prefer higher expected earnings to lower expected earnings. The variance of gamble 1 is p(1-p)X^2, > which means that the variance is low for low and high values of p, and high > for middle values of p. So if p is low, as p is increased, both the mean > and variance rise. From my brief foray into the finance literature (I sat > on a Ph.D. committee in finance a few years back), my recollection is that > risk neutrality works badly. > Bill Sjostrom > > +++++++++++++ > William Sjostrom > Senior Lecturer > Department of Economics > National University of Ireland, Cork > Cork, Ireland > > +353-21-490-2091 (work) > +353-21-427-3920 (fax) > +353-21-463-4056 (home) > [EMAIL PROTECTED] > [EMAIL PROTECTED] > www.ucc.ie/~sjostrom/ > > ----- Original Message ----- > From: "Bryan Caplan" <[EMAIL PROTECTED]> > To: <[EMAIL PROTECTED]>; <[EMAIL PROTECTED]> > Sent: Monday, November 11, 2002 8:35 PM > Subject: EU > > > It's well-known that expected utility theory has a lot of problems. A > > number of alternative theories of choice under uncertainty haven't > > worked out too well either. > > > > Has anyone ever proposed a bare-bones theory of choice under > > uncertainty, basically saying only that all else equal, you become more > > likely to choose an option as it's expected value increases (without > > saying how much)? Suppose, for example, that you get to choose between > > two gambles: > > > > Gamble 1: $X with probability p. > > > > Gamble 2: $Y with probability q. > > > > Indicate preference with > or <, and probability as P(.). > > > > My bare bones theory says: > > > > 1. P(1>2) increases in p. > > 2. P(1>2) decreases in q. > > 3. P(1>2) increases in X. > > 4. P(1>2) decreases in Y. > > > > and nothing more specific. > > > > Is this inconsistent with any experimental evidence? > > -- > > Prof. Bryan Caplan > > Department of Economics George Mason University > > http://www.bcaplan.com [EMAIL PROTECTED] > > > > "He wrote a letter, but did not post it because he felt that no one > > would have understood what he wanted to say, and besides it was not > > necessary that anyone but himself should understand it." > > Leo Tolstoy, *The Cossacks* > > > > > > -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] "He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it." Leo Tolstoy, *The Cossacks*
