Chapter 12. Non-Expected Utility Models Under Objective Uncertainty

Although expected utility (EU) theory is a powerful tool for the analysis of decision under risk, it has long been known that individual behavior, in both experimental and market settings, deviates from the predictions of simple EU models. These violations of EU predictions were largely disregarded until the late 1970s, when a variety of alternatives to, and generalizations of, EU theory began to appear, most notably prospect theory of Kahneman and Tversky. Dozens of generalized EU models appeared in the 1980s and early 1990s. Of these, the most prominent classes were rank-dependent models, betweenness models and regret-theoretic approaches.