Abstract and Keywords
Research in managerial economics has long relied on the discounted subjective expected utility model as its workhorse decision framework, and this article identifies some challenges to that model. Experimental evidence suggests that subjects have preferences biased more toward the present than the standard model predicts, and these biases can lead to time inconsistent behavior. Risk attitudes tend to be very context specific, and capturing them requires not just nonlinear transformations of the payoffs, as in the standard model, but also nonlinear transformations of the probabilities. Individuals tend to be more averse to uncertainty or ambiguity, situations in which the probabilities are unknown, than to risk, situations in which the probabilities are known, and the standard framework cannot distinguish between the two. The article identifies implications for all of these departures from the workhorse model.
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