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We extend Kreps and Porteus' (1978, 1979a,b) temporal utility theory to include measures of suspense for gambles that vary in the timing of uncertainty resolution. Our f$ sp t$-modification (of their theory) defines overall utility and suspense in terms of two functions: a standard utility function and an iterative function whose properties determine attitude towards temporal uncertainty resolution. Suspense, which is increasing with time delay to uncertainty resolution, is defined as the "variance" of the standard utilities of the outcome streams taken about our measure of overall utility (rather than about the standard mean utility). We explore the properties of our measures and their implications for the overall utility and suspense of various key examples. Two preliminary experiments are reported which give some support for our overall utility and suspense measures, and which suggest that risk and suspense are different concepts. Iteration theory is also discussed in some detail.

Companies and organizations must make decisions concerning capital budgeting. Capital budgeting is a decision-making process that determines whether a firm should purchase equipment to be used on a long-term basis. The initial investment in the equipment is predicted to be returned through revenue gained by the use of the equipment over its lifetime. However, there is inherent risk associated with these investment decisions. Therefore, potential purchasers must decide whether the risk involved with investing in the equipment is justified. This dissertation addresses risk-based technology assessment for capital equipment acquisition decisions in small firms. Technology assessment, here, is concerned with understanding the uncertainty associated with assessing the value predicted in the capital budgeting process. When analyzing the risk for a given technology, we assign a probability law to its net present value. Our primary research contribution is providing an analytical framework together with a computational strategy to support capital equipment budgeting in firms where the value of candidate technologies can represent nearly all the firm’s value. Since small firms typically have limited budgets, spending for technology is always a difficult budgeting decision. The organization’s administration must decide which, if any, among the available technologies will be best for their operation. The process for acquiring technology in many small firms can be filled with challenges. Most important among them is that capital budgeting is typically a “one-off” decision. These decisions are difficult since the candidate technologies may not have operational data available. Thus, decision makers need some means to predict how the proposed technology (e.g., equipment or machinery) will be used. Hence, firms should follow techniques and procedures based on appropriate normative principles and well-established theory. Senior company executives and/or governance boards are often authorized to approve capital equipment purchases. However, these company leaders may not have adequate expertise in the operations of candidate technologies or may lack the understanding necessary to determine how new technologies may impact other company operations. Appropriate financial evaluation measures and selection criteria that incorporate risk are critical to making sound, quantitative acquisition decisions. The research reported here offers an analytical framework for comparing different technology alternatives in capital budgeting decisions. Comparison is based on the expected net present value and the risk (i.e., probability law on net present value) associated with each decision alternative. To this end, the operational characteristics of each technology alternative are connected to their potential revenue and cost streams. The framework is embedded within a computational architecture that can be customized to account for operations and technologies in specific application scenarios. One major barrier addressed by this research is overcoming the fact that new technologies typically have no historical operational data. Therefore, characterizing the uncertainty of operations (e.g., distribution of the equipment lifetime) can be very difficult. Discrete- event simulation is used to generate potential revenue and cost estimates. We demonstrate the tractability and practicality of the analytical framework and computational architecture via a healthcare technology assessment decision. Data extracted from a published journal article detailing a hospital’s technology assessment decision are used to find the risk of the medical technology using the computational architecture developed. Widely-available, no-cost software tools are employed. Results of the health care example suggest that the financial analysis in the original technology assessment was in- adequate and simplistic. Small firms may find this research particularly beneficial because potential investments can be a significant portion of a small firm’s value.

Escalation of commitment to failing investments is considered to be representative of biased forms of decision-making which may result in unproductive consequences. Decision makers adopt investment courses of action in initial conditions of uncertainty, which subsequently appear to lead to failure. When confronted with the prospect of their decisions producing losses, they commit decision errors thus escalating their commitment to their original courses of action. Several theories with rational and irrational antecedents have been developed in the literature to explain the escalation phenomenon. Fundamental theoretical differences are associated with the origin of the concept. Escalation of commitment was conceived in the decision theory context of the problem of resource allocation under uncertainty conditions. This thesis describes the resource allocation problem in order to identify and explain associated characteristics. Explanations of these characteristics reveal several problems: there are no decision rules available to handle uncertainty; decision makers consistently violate the requirements for rationality and rational economic decision making; individual utility maximization is divorced from the business objective of profit maximisation and also involves taking increased risks when there is an expectation that investment losses will be recovered; there are several criteria for and methods of investment evaluation which are computationally and analytically difficult to apply; and whether a decision error has been made is indeterminate with some investment projects whose success or failure cannot be determined until after project completion. These problems lead to the conclusion that the determination of the success or failure of an investment decision may depend on the valuation methodology selected. In this respect it is argued that investment decisions undertaken in public organisations should be evaluated using methodologies developed to measure social benefits and costs because calculations of private rates of return provide misleading assessments. Research on the escalation phenomenon is dominated by a psychological perspective, which obtains its findings from extensive investigation of individuals in controlled experimental laboratory conditions. The experimental research has identified personal pre-dispositional, social and situational influences, which contribute to escalation and de-escalation of commitment. The major research focus has resulted in two theoretical explanations for escalation of commitment. These derive from descriptive cognitive motivational theories concerned with expectancy, that encourage rational decision making and dissonance, which in turn produce irrational self justification based decisions. An alternative research focus favours explanations from prospect theory. Research, critical of the psychological explanations favours rational explanations derived from the normative theory of expected utility, which encourages individual self-interested behaviour. This thesis is concerned with explaining escalation of commitment in organisations. This necessarily involves adopting an interdisciplinary perspective. This thesis examines two world expositions, Expo 86 and Expo 88. World expositions are unusual government events whose principal purpose is to celebrate human achievements. Expo 86 was held to celebrate Vancouver’s centenary. Expo 88 was held to celebrate Australia’s bicentennial. They were not designed for their potential profitability. To justify the expenditures involved other objectives are attached to the celebratory purpose. These usually are associated with urban renewal and economic development. They are unorthodox investment projects. They involve long lead times of capital expenditure followed by short operating periods of six months or less, after which time most of the capital improvements are either disposed of or demolished. Expo 86 incurred significant financial losses and was considered an escalation prototype. It became a case study used to develop a generalized theoretical model of escalation. The model specifies how initially formulated rational decisions are replaced progressively by decisions based on self-justification, which escalate commitment. Escalation is reinforced by psychological pre-dispositional, social and structural influences. The model is an extension of research findings from individual laboratory experiments. The thesis identifies several plausible alternative theoretical explanations for escalation in organisations. These involve emotional commitment, social influences to conform to group norms, the possibilities for deviating from rational decision making principles in the presence of uncertainly and the agency theory problem which involves individuals pursuing their own rational self interests which are contrary to the objectives of an organisation. Expo 86 was directly linked to urban renewal objectives. The economic project and urban planning studies of Expo 86 concluded that the event successfully achieved the urban development objectives using social cost benefit analysis as the criterion of evaluation. These objectives were rationally conceived and executed. As a result of the examination, the thesis explores the problems associated with investment projects having multiple objectives, looks at how rational explanations can be accommodated in the theoretical model and questions whether calculations of accounting negative rates of return should be the criteria for evaluation and the determinant of whether Expo 86 qualified as a prototypical example of escalation in organisations. The analysis of Expo 88 reinforced these concerns. A longitudinal dimension was adopted in the case study. This enabled the origins of the event to be explored, the objectives to be identified and the project to be evaluated using various private and public investment criteria. Expo 88 qualified as a failed private investment project on all but one of the financial investment criteria employed. The evaluation of Expo 88 as a public investment project produced social benefits and economic impacts in excess of social costs. Expo 88 was conceived by influential individuals who promoted the initiative for an exposition on the basis that its staging would be publicly and personally beneficial. The project was associated with multiple objectives other than its celebratory purpose that included tourism development and urban renewal from which the public was expected to benefit and which promoters believed justified the event. The principal decision makers were not directly influenced by profitability considerations because information had been provided during the planning phase, which indicated that the project would produce financial losses. Because of public pronouncements it became politically necessary to include the profitability of the project as an objective. Various costly and deceptive measures were adopted in order to generate an impression of profitability. At the same time success was promoted publicly and successfully, not in terms of its profitability, but in terms of attendance figures. As a result of the analyses, the theoretical model was modified by incorporating rational motives into the original structure. Decision makers were driven by rational motives over the life of the projects. In the case of Expo 88 these rational motives derived from agency theory relationships and the pursuit of objectives concerned with economic development, celebration and political recognition. The thesis concludes with a discussion of the contributions and limitations of the research. The contributions involve modifications to the theoretical model to reflect the importance of rational motives in the decision making process, generalisation of the causes of escalation in organisations in various contingent circumstances and the impact that multiple project objectives and methodological problems concerned with evaluation criteria have on theory development. The major limitation relates to the selection of public organisations engaged in unorthodox investment projects as inappropriate representatives to examine the escalation phenomenon.

Thesis (Ph. D.)--University of Oregon, 2007. / Typescript. Includes vita and abstract. Includes bibliographical references (leaves 109-115). Also available for download via the World Wide Web; free to University of Oregon users.

The purpose of this study is to investigate which groups of individuals are less likely to follow the authorities’ recommendations during the COVID-19 pandemic in Sweden. The thesis aims to explain the decision-making of these individuals during a pandemic based on the theory of Expected Utility. A linear probability model is estimated in addition to a logistic regression. The study finds that the estimated effect of gender and age are significantly different from zero when considering socioeconomic control variables. The results suggest that older individuals’ expected utility is higher when following the recommendations. For men as well as younger individuals, the theory needs an extended analysis including factors from a behavioural economics point of view. This paper is an addition to an increasing number of studies conducted on the COVID-19 pandemic. / Syftet med studien är att undersöka vilka individer som är mindre sannolika att följa de allmänna råd och rekommendationer som myndigheter uppmanar till under COVID-19 pandemin i Sverige samt att konkretisera potentiella bakgrunder till varför vissa individer väljer att inte följa de utifrån teorin om förväntad nytta. Tidigare studier har visat att män och yngre individer är mindre benägna att följa restriktioner under andra pandemier. Mot den bakgrunden formulerades uppsatsens hypoteser att män och yngre individer är mer sannolika att inte följa rekommendationer under pandemin i Sverige. En linjär sannolikhetsmodell och en logistisk regression estimerades, där ålder och kön var determinanter mot en binär utfallsvariabel definierad som 0 = följer rekommendationer och 1 = följer inte rekommendationer. Resultatet visade att kön och ålder uppvisade en effekt signifikant skild från noll även efter socioekonomiska kontroller. Utifrån förklaringsmodellen tyder resultatet på att äldre individer har en hög förväntad nytta av att följa rekommendationer. För män och yngre individer behöver teorin hämta stöd från beteendeekonomin. En fördjupande analys av individers riskpreferenser rekommenderas i framtiden för att ge tydliga rekommendationer till olika grupper i samhället.

I analyzed the effects of Agriculture Risk Coverage (ARC) and Revenue Protection crop insurance (RP) on the RP coverage level by certainty equivalents and certainty equivalent returns. ARC is a commodity program that falls under Title I of the 2014 farm bill and triggers a payment for a participating producer once his actual revenue falls below a band of 76-86 percent of a calculated expected revenue. RP is a revenue-based crop insurance program that allows for a producer to sign up for one of eight different coverage levels ranging from 50-85 percent in 5 percent increments. This leads to the idea that in order to maximize his utility, a fully-informed, expected-utility maximizing producer should not choose to select full coverage RP but rather select the 75 percent RP and pair it with the ARC program. This analysis is conducted under the conceptual frameworks of expected-utility and cumulative prospect theory.

L'objectif central de cette thèse est d'étudier le comportement de fraude fiscale des contribuables quand ils ne déclarent qu'une partie de leur revenu. Le premier chapitre complète la littérature existante en étudiant le niveau de déclaration du revenu et les effets de changements des taux de taxe, de pénalité et de probabilité de contrôle, en considérant des fonctions d'imposition et de pénalité non linéaire, dans le cadre de la théorie de l'espérance de l'utilité.Le cadre fourni par la théorie des perspectives cumulatives est ensuite utilisé dans le second chapitre. L'accent est mis sur la dépendance des décisions du contribuable vis-à-vis du revenu de référence introduit par cette théorie. Le troisième chapitre caractérise le barème optimal d'imposition du revenu et la stratégie de contrôle et de pénalité que doit mettre en place l'État quand le comportement de fraude des contribuables vérifie les propriétés de la théorie des perspectives. / This dissertation analyzes the tax evasion behavior of taxpayers when they do not declare their entire income. The first chapter studies the declaration of the taxpayer and the effects of changes in the tax rate, the penalty rate and the probability of audit. The tax and the penalty functions are assumed to be non linear. The setting is provided by expected utility theory. The setting provided by cumulative prospect theory is used in the second chapter. Reference dependence, which is a central point in this theory, is particularly studied. The third chapter characterizes the optimal income tax and audit schemes under taxe evasion behavior, when of tax payers behave as predicted by prospect theory.

[pt] As impactantes transformações pelas quais o Brasil passou durante o início da década de 1990 exigiram mudanças profundas no setor elétrico. O Decreto n 5.163/2004 introduziu ao mercado brasileiro de energia elétrica o Ambiente de Contratação Livre (ACL), onde os agentes passaram a poder negociar livremente contratos bilaterais de compra e venda de energia. No Brasil, os agentes participantes estão expostos às bruscas variações do preço da energia no curto prazo, chamado de Preço de Liquidação das Diferenças – PLD. Devido às restrições existentes na malha de transmissão, os valores do PLD se distinguem entre os quatro Submercados existentes: Norte, Nordeste, Sul e Sudeste/Centro- Oeste. Ao fechar contratos em Submercados diferentes, o gerador deve vender a energia ao PLD local e comprá-la ao preço spot do Submercado de destino. Desta forma, o vendedor corre o risco de vender a um PLD mais baixo do que deverá comprar. O swap de submercado pode ser utilizado para anular esta exposição, mas cabe investigar o preço que cada parte deve estar disposta a pagar para fechar o negócio. Assim, é proposta uma abordagem pela Teoria da Utilidade para se chegar a estes valores. Dado que os Submercados Sudeste/Centro-Oeste e Nordeste atualmente transacionam entre si a maior carga, estes foram selecionados para avaliação. O ano de 2015 foi utilizado para delimitar o estudo. Presume-se que ambas as partes são avessas ao risco de forma decrescente e que há equilíbrio de forças na negociação. O valor final do contrato é estimado em 10,66 reais/MWh. / [en] The impacting transformations suffered by Brazil during the 1990s demanded profound changes in the eletrical sector.Decree 5.163/2004 established the Ambiente de ContrataçãoLivre (ACL), allowing participants to freely negotiate bilateral energy contracts. In Brazil, those who do so are exposed to extreme variations in spot prices, called Preço de Liquidação das Diferenças – PLD. Due to transmission capacity restrictions, PLD prices vary between the four existing submarkets: North, Northeast, South, and Southeast/Central-West. Dealing in different submarkets requires electricity generators to sell energy for local PLD and buy it for the spot price of the destination submarket. By doing so the seller may end up selling energy for a lower PLD than the buying price. Submarket swaps can be used for hedging, but what each party should be willing to pay requires investigation. Thus, to discover these prices, the Utility Theory is applied. Given that submarkets Southeast/Central-West and Northeast are currently the ones concentrating the greatest amount of transactions, these were selected for evaluation. Year 2015 was used to delimit the study. It is assumed that both parties are risk averse in a decreasing manner and that there is an equilibrium of forces in the negotiation. The final value of the contract is estimated at 10,66 reais/MWh.