ASPIRATION LEVEL,PROBABILITY OF SUCCESS AND FAILURE,AND EXPECTED UTILITY* |
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| Authors: | Enrico Diecidue Jeroen Van De Ven |
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| Affiliation: | 1. INSEAD, France;2. University of Amsterdam, the Netherlands;3. We wish to thank Marco LiCalzi, R. Duncan Luce, Fabio Maccheroni, Rakesh Sarin, George Wu, and especially Peter P. Wakker, Charles Horioka (the Editor), and three anonymous referees for very helpful suggestions. Jeroen van de Ven gratefully acknowledges support from the Netherlands Organization for Scientific Research (NWO) grant 457‐05‐005. Please address correspondence to: Enrico Diecidue, INSEAD, Bd. de Constance, 77305 Fontainebleau Cedex, France. E‐mail: . |
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| Abstract: | ![]()
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 behavioral 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 behavior, and can explain choices violating the mean‐variance approach. |
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