Description: Charles Sivesind Lecture: Faruk Gul (Princeton)

Location: 368A Heady Hall

Contact Person: Jian Li

Title: Lorenz Expected Utility Theory

Abstract: We characterize all nonexpected utility functions based on a cardinal utility index. Our main assumption, Preference-Mixture Certainty Independence, is the counterpart of certainty-independence in the pure risk setting. Our model includes rank-dependent expected utility, disappointment aversion and probabilistically sophisticated maxmin expected utility theory as special cases. Our representation is a generalization of a welfare function proposed by Sheshinski (1972) where one minus the Gini index is multiplied by per capita GDP. In our generalization, a function of the utility-Lorenz curve, which we call the Generalized Gini Discount, is multiplied by expected utility. Our analysis reveals some features of nonexpected utility preferences: rank-dependent expected utility preferences and disappointment averse preferences are a subset of maxmin nonexpected utility preferences.