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Aspiration level, probability of success and failure, and expected utility

Author: Diecidue, Enrico ; Van den Ven, JeroenINSEAD Area: Decision SciencesIn: International Economic Review, vol. 49, no. 2, May 2008 Language: EnglishDescription: p. 683-700.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: 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 behavioural 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 behaviour, and can explain choices violating the mean-variance approach
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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 behavioural 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 behaviour, and can explain choices violating the mean-variance approach

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