Abstract

In order to accommodate empirically observed violations of the independence axiom of expected utility theory Becker and Sarin (1987) proposed their model of lottery dependent utility in which the utility of an outcome may depend on the lottery being evaluated. Although this dependence is intuitively very appealing and provides a simple functional form of the resulting decision criterion, lottery dependent utility has been nearly completely neglected in the recent literature on decision making under risk. The goal of this paper is to revive the lottery dependent utility model. Therefore, we derive first a sound axiomatic foundation of lottery dependent utility. Secondly, we develop a discontinuous variant of the model which can accommodate boundary effects and may lead to a lexicographic non-expected utility model. Both analyses are accompanied by considering some functional specifications which are in accordance with recent experimental results and may have significant applications in business and management science