Jelena Z. Stanković, Evica Petrović

DOI Number
First page
Last page


Expected utility theory provides a framework for modeling choice of a rational individual, whose goal is to maximize expected utility to the preferences towards risk. However, extreme risks, such as, for example, a stock market crash or a natural disaster, significantly affect the function of the probability distribution of outcomes by adding the weight to the tails of the distribution. In such cases, the application of the theory of decision-making is extremely sensitive to assumptions on the probability distribution function. Therefore, this paper will provide a review of models of decision-making in terms of expected utility theory under extreme risk.


Expected utility, extreme risk, decision-making

Full Text:



Adger, W. N. (2006) Vulnerability. Global environmental change, Volume 16(3): 268-281.

URL: http://www.sciencedirect.com/science/article/pii/S0959378006000422

Allais, M. (2008) Allais Paradox, in Steven N. Durlauf and Lawrence E. Blume, eds., The New Palgrave Dictionary of Economics, 2nd ed., Palgrave Macmillan.

Allais, M., Hagen, O. (1979) Expected utility hypotheses and the Allais paradox, Volume 21, Springer Science & Business Media.

Al‐Najjar, N. I., Castro, L. (2010) Subjective Probability. Wiley Encyclopedia of Operations Research and Management Science.

Andreoni, J., Sprenger, C. (2010) Certain and uncertain utility: The allais paradox and five decision theory phenomena. URL: http://econpapers.repec.org/paper/clalevarc/814577000000000447.htm

Arrow, K. (1951) Social choice and individual values, New York, Wiley.

Buchholz, W., Schymura, M. (2012) Expected utility theory and the tyranny of catastrophic risks, Ecological Economics, Volume 77: 234-239. URL: http://www.econstor.eu/handle/10419/40165

Campbell, J. Y., Viceira, L. M. (2002) Strategic asset allocation: portfolio choice for long-term investors. Oxford University Press.

Carey, M. P. (2014) Cost-Benefit and Other Analysis Requirements in the Rulemaking Process. CRS Report. URL: https://www.fas.org/sgp/crs/misc/R41974.pdf

Chichilnisky, G. (1996) An axiomatic approach to sustainable development, Social choice and welfare, Volume 13(2): 231-257. URL: http://link.springer.com/article/10.1007/BF00183353

Chichilnisky, G. (2009) The topology of fear, Journal of Mathematical Economics, Volume 45(12): 807-816. URL: http://www.sciencedirect.com/science/article/pii/S0304406809000639

Chichilnisky, G. (2011) Catastrophic risks with finite or infinite states, International Journal of Ecological Economics & Statistics, Volume 23(11): 3-18.

Coburn, A.W., Bowman, G., Ruffle, S.J., Foulser-Piggott, R., Ralph, D., Tuveson, M. (2014) A Taxonomy of Threats for Complex Risk Management, Cambridge Risk Framework series; Centre for Risk Studies, University of Cambridge.

Ellsberg, D. (1961) Risk, ambiguity, and the Savage axioms. The quarterly journal of economics, Volume 75(4): 643-669. URL: http://www.jstor.org/stable/1884324

Fishburn, P. C. (1983) Transitive measurable utility, Journal of Economic Theory, Volume 31(2): 293-317. URL: http://www.sciencedirect.com/science/article/pii/0022053183900790

Geweke, J. (2001) A note on some limitations of CRRA utility, Economics Letters, Volume 71: 341-345. URL: http://www.sciencedirect.com/science/article/pii/S0165176501003913

Grechuk, B., Zabarankin, M. (2014) Risk averse decision making under catastrophic risk, European Journal of Operational Research, Volume 239(1): 166-176.

Helbing, D. (2012) Systemic risks in society and economics. In Social Self-Organization, (pp. 261-284). Springer Berlin Heidelberg. URL: http://link.springer.com/chapter/10.1007%2F978-3-642-24004-1_14

Ikefuji, M., Laeven, R. J., Magnus, J. R., Muris, C. (2010) Expected Utility and Catastrophic Risk. Working Paper, Tilburg University. URL: http://papers.tinbergen.nl/14133.pdf

Kahneman, D., Tversky, A. (1979) Prospect theory: An analysis of decision under risk. Econometrica, Volume 47 (2): 263-291. URL: http://www.jstor.org/stable/1914185

Keynes, J. M. (1921) A treatise on probabilities. London, Macmillan & Co.

Loomes, G., Sugden, R. (1987) Some implications of a more general form of regret theory, Journal of Economic Theory, Volume 41(2): 270-287.

Machina, M. J. (1982) “Expected Utility” Analysis without the Independence Axiom. Econometrica, Volume 50(2): 277-323. URL: http://www.jstor.org/stable/1912631

Markowitz, H. (1952) Portfolio selection. The journal of finance, Volume 7(1): 77-91. URL: http://links.jstor.org/sici?sici=0022-1082%28195203%297%3A1%3C77%3APS%3E2.0.CO%3B2-1

Metzger, M. J., Leemans, R., Schröter, D. (2005) A multidisciplinary multi-scale framework for assessing vulnerabilities to global change. International Journal of Applied Earth Observation and Geoinformation, Volume 7(4): 253-267.

O’Brien, K., Eriksen, S., Sygna, L., Naess, L.O. (2006) Questioning complacency: Climate change impacts, vulnerability, and adaptation in Norway, Ambio, Volume 35(2): 50-56. URL: http://www.jstor.org/


Pavličić, D. (2014) Teorija odlučivanja, Beograd, Ekonomski fakultet.

Posner, R. A. (2004) Catastrophe: risk and response. Oxford University Press.

Quiggin, J. (1982) A theory of anticipated utility, Journal of Economic Behavior & Organization, Volume 3(4): 323-343.

URL: http://www.sciencedirect.com/science/article/pii/0167268182900087

Rabin M. (2000) Risk Aversion and Expected-Utility Theory: A Calibration Theorem. Econometrica, Volume 68 (5): 1281 – 1292. URL: http://dx.doi.org/10.1111/1468-0262.00158

Savage, L. J. (1972) The foundations of statistics. Courier Corporation.

Starmer, C. (2000) Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk, Journal of economic literature, Volume 38(2): 332-382.

URL: http://www.jstor.org/stable/2565292

Sunstein, C. R. (2005) Cost‐Benefit Analysis and the Environment*, Ethics, Volume 115(2): 351-385. URL: http://www.jstor.org/stable/10.1086/426308

Turner, B. L., Kasperson, R. E., Matson, P. A., McCarthy, J. J., Corell, R. W., Christensen, L., ... Schiller, A. (2003) A framework for vulnerability analysis in sustainability science, Proceedings of the national academy of sciences, Volume 100(14): 8074-8079.

URL: http://www.pnas.org/content/100/14/8074.full

Tversky, A., Kahneman, D. (1992) Advances in prospect theory: Cumulative representation of uncertainty, Journal of Risk and uncertainty, Volume 5(4): 297-323.

URL: http://link.springer.com/article/10.1007/BF00122574

Von Neumann, J., Morgnestern, O. (1947) The Theory of Games and Economic Behavior, 2nd ed., Princeton, N.J.: Princeton University Press.

Weitzman, M. L. (2009) On modeling and interpreting the economics of catastrophic climate change, The Review of Economics and Statistics, Volume 91(1): 1-19.

URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.91.1.1

Yaari, M. E. (1987) The dual theory of choice under risk, Econometrica, Volume 55(1): 95-115.

URL: http://www.jstor.org/stable/1911158


  • There are currently no refbacks.

© University of Niš, Serbia
Creative Commons License CC BY-NC-ND
ISSN 0354-4699 (Print)
ISSN 2406-050X (Online)