Two-Moment Decision Models and Expected Utility Maximization

Abstract

Two-moment decision models are consistent with expected utility maximization only if the choice set or the agent's preferences are restricted. All currently available restrictions, such as quadratic utility or normality, are either theoretically deficient and/or empirically rejected. This paper identifies another restriction which is sufficient to ensure consistency between the two approaches and confirms that it holds in many economic models. Implications of this restriction for moment model analysis are then derived. Copyright 1987 by American Economic Association.

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