Jose Encarnacion

Preference paradoxes and lexicographic choice

Abstract Results of various experiments reported in the literature have shown repeated violations of expected utility theory. This paper presents a model of lexicographic choice under uncertainty that has the probability of gain (or, at least, no loss) and the best possible outcome as well as expected utility as determinants of choice under different conditions. The model easily explains the observed violations and other curious preference patterns including the Allais and Ellsberg paradoxes, probalistic insurance, preference reversals, preference cycles, and the reflection, isolation and translation effects. Despite its explanatory power, the model is as testable as the expected utility hypothesis.

Social values and individual choices

This paper sketches a theory of social choice based on a lexicographic ordering of multiple social values that can be pursued to greater or lesser degrees. Distinctions are made among the following concepts: (a) the vector-valued social decision, which results from individual choices regarding its components; (b) the social choice, which calls the compliance by the members of society with the social decision; and (c) social welfare judgements, which apply to situations where individual choices violate the social choice. A resolution of the Sen-Gibbard libertarian paradox follows from the theory.

Portfolio Choice and Risk

Risk aversion and the riskiness of assets are interpreted in terms of a model of portfolio choice where the maximand is conditional on the probability of satisfying a minimum constraint on the future value of the portfolio. It is a consequence that the riskiness of the average asset in the portfolio increases with wealth, and when expected value is the maximand, low-risk low-return assets are inferior goods. The model also gives straightforward explanations of the Allais paradox and other puzzling patterns of choice under risk.

Optimum quantity of money instability

It is shown that optimum quantity of money equilibria are unstable in the simplest models. Getting back to the desired path requires a temporar y suspension of the money growth rule.

Group choice with lexicographic utility

Abstract Given a group decision problem and assuming lexicographic utility functions, this paper proposes a solution which is a repeated application of Pareto optimality. If unique, the solution is characterized by four conditions similar to those of Nash (1950) for a bargaining problem. The group choice satisfies the desideratum that it be independent of non-available alternatives.