Collaborative Research in Decision, Risk, and Management Science: Utility Theories with Joint Receipts and Reference Levels

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9308959 Luce Almost forty years of experience with theories about rational decision making on the part of individuals confronting risk and uncertainty -- technically, subjective expected utility theories (SEU) -- has led to two firm conclusions. One, stressed primarily by psychologists, is that this class of models, while overall fairly descriptive, fails to describe certain crucial aspects of actual behavior in many experimental and real world situations. The other, stressed primarily by economists and decision analysts, is that the axioms of the SEU model are normatively very compelling and the model has proved useful in numerous applied situations. Recognizing both the descriptive failure and normative usefulness of the classical model, the PIs have explored the common ground held by both the experimentalists and the applied decision analysts, attempted to discover exactly where the two part company, and sought a prescriptive theory that satisfies both experimental concerns and applied expectations. Like SEU this new theory -- technically rank- and sign-dependent utility (RSDU) theory -- is based (axiomatically) on fairly simple, quite compelling, underlying behavioral principles, and also like SEU, it results in a numerical representation as a weighted average, but unlike SEU the weights are not probabilities and their values depend not only on the underlying chance event but on whether the associated outcome is a gain or a loss. Fundamental to the theory is the differential treatment of an event depending on whether it is associated to a gain or a loss relative to a status quo and the incorporation of the concept of joint receipt -- of getting two or more things at the same time -- that allows an explicit, simple characterization of the fundamental non-rationality of the theory. This project examines several theoretical, experimental, and applied issues that remain unresolved: On the theoretical side, while RSDU is a fairly good descriptive theory of choice behavior, it needs modification to accommodate the violations of its axioms which occur when judged certainty equivalents are used rather than choice procedures. On the empirical side, the project examines, among other things, Thaler's rule for the utility of the joint receipt of two or more things; the descriptive validity of the quasi-rational assumptions underlying RSDU; the construction of a reference level (local status quo) in terms of the choice set; and alternative combination rules for the aggregation of gains and losses around the status quo. Regarding applied issues, we are convinced that the status quo plays an important role in decision making and so it is highly desirable to develop prescriptive theories that depend explicitly on it. In addition, the project will investigate the limitations and potential pitfalls of sign dependent utility as a prescriptive theory. ***