The Limitations of Prospect Theory and the Expected Utility Theory: A New Theory

摘要

The expected utility theory has been the standard theory in modeling production under uncertainty. It has been extensively employed by the theoretical and empirical literature. Sometimes, it is labeled as "theory of the firm under uncertainty." Theory of the firm under uncertainty employs a concave utility function, which implies risk aversion. Consequently, the firm's output is less than its certainty-equivalent level. This result became the fundamental principle of theory of the firm.