Are CEOs Expected Utility Maximizers? / John List, Charles Mason.

Format:

Book

Author/Creator:

List, John.

Contributor:

National Bureau of Economic Research.

Mason, Charles.

Series:

Working Paper Series (National Bureau of Economic Research) no. w15453.

NBER working paper series no. w15453

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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.

Notes:

Print version record

October 2009.