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The S-Shaped Utility Function

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Abstract

The results generated by experimentalists in psychology and economics haveled to numerous advances in the study of human decision making under risk.Camerer (1995) and Rabin (1998) provide excellent reviews of the relevantliterature. These results clearly display the gap between normative theoriesof ideal behavior and descriptive theories of observed behavior. The mostprominent result is loss aversion – the observation that a loss is given greatervalue than a gain of an equal size – and the resulting S-shaped utility function.

Rabin puts the key point as follows: ``Researchers have identified a pervasive feature of reference dependence: In a wide variety of domains, people are significantly more averse to losses than they are attracted to same size gains''(Rabin 1998, 13–14). In what follows, I will show that the ``wide variety of domains'' is wide indeed. In particular, I will review the effects of the S-shaped utility function on the resolution of the decision to commit a crime, to decision to violate professional ethics, and the decision to participate in a rebellion.

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  1. College of Business and Economics, University of Idaho, Moscow, ID, 83843-3161, USA E-mail

    R. Dacey

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Dacey, R. The S-Shaped Utility Function. Synthese 135, 243–272 (2003). https://doi.org/10.1023/A:1023465024536

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