Are CEOs expected utility maximizers?

John A. List, Charles F. Mason

Research output: Contribution to journalArticleResearchpeer-review

17 Citations (Scopus)

Abstract

Are individuals expected utility maximizers? This question represents much more than academic curiosity. In a normative sense, at stake are the fundamental underpinnings of the bulk of the last half-century's models of choice under uncertainty. From a positive perspective, the ubiquitous use of benefit-cost analysis across government agencies renders the expected utility maximization paradigm literally the only game in town. In this study, we advance the literature by exploring CEO's preferences over small probability, high loss lotteries. Using undergraduate students as our experimental control group, we find that both our CEO and student subject pools exhibit frequent and large departures from expected utility theory. In addition, as the extreme payoffs become more likely CEOs exhibit greater aversion to risk. Our results suggest that use of the expected utility paradigm in decision making substantially underestimates society's willingness to pay to reduce risk in small probability, high loss events.

Original languageEnglish
Pages (from-to)114-123
Number of pages10
JournalJournal of Econometrics
Volume162
Issue number1
DOIs
Publication statusPublished - May 2011
Externally publishedYes

Keywords

  • Decision making under uncertainty
  • Experiments
  • High stakes

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