Paper #576

Title:

The domain and interpretation of utility functions: An exploration

Authors:

Marc Le Menestrel and Luk N. Van Wassenhove

Date:

October 2001

Abstract:

This paper proposes an exploration of the methodology of utility functions that distinguishes interpretation from representation. While representation univocally assigns numbers to the entities of the domain of utility functions, interpretation relates these entities with empirically observable objects of choice. This allows us to make explicit the standard interpretation of utility functions which assumes that two objects have the same utility if and only if the individual is indifferent among them. We explore the underlying assumptions of such an hypothesis and propose a non-standard interpretation according to which objects of choice have a well-defined utility although individuals may vary in the way they treat these objects in a specific context. We provide examples of such a methodological approach that may explain some reversal of preferences and suggest possible mathematical formulations for further research.

Keywords:

Utility, representaion, interpretation, preference reversal

JEL codes:

A12, D00, D81

Area of Research:

Business Economics and Industrial Organization

Published in:

Theory and Decision, 51, (2001)

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