Asset Demand Based Tests of Expected Utility Maximization

Felix Kübler · Larry Selden · Xiao Wei

42 citations0/0 files storedAmerican Economic Review

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Decision-Making and Behavioral Economics Economic and Environmental Valuation Economic theories and models

Abstract

We provide conditions under which contingent claim and asset demands are consistent with state independent Expected Utility maximization. The paper focuses on the case of a single commodity and demands are allowed to be functions of probabilities and not just prices and income. We extend prior analyses by deriving three distinct tests for demands to be rationalized by Expected Utility: (i) a contingent claim analogue to the certainty strong axiom of revealed preference, (ii) a characterization of the functional form for demand, and (iii) necessary and sufficient conditions based on the Slutsky matrix. (JEL D01, D11, D81)

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References

1948Foundations of Economic Analysis.1938A Note on the Pure Theory of Consumer's Behaviour 1982The Nonparametric Approach to Demand Analysis 1967The Construction of Utility Functions from Expenditure Data 1992Choice Under Uncertainty: Problems Solved and Unsolved 2012Risk Preferences Are Not Time Preferences 1974Rational Behavior, Uncertain Prospects, and Measurable Utility (1950)2007Consistency and Heterogeneity of Individual Behavior under Uncertainty

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