The standard argument against anything other than EU maximization (note that consistent loss-aversion may arise from diminishing marginal utility of money; loss-aversion only is interesting when directionally inconsistent) in economics involves Dutch-booking: the ability to set people up as money pumps and extract money from them by repeatedly offering subjectively preferred choices that violate transitivity. Essentially, EU maximization might be something we want to have because it induces consistency in decision-making.
For instance, imagine a preference ordering like the one in Nick_Tarleton’s adjacent comment, where +10 is different from +20-10. Let us say that +9=+20-10 (without loss of generality; just pick a number on the left side).
Then I can offer you +9 in exchange for +20-10 repeatedly, and you’ll prefer it every time, but you ultimately lose money.
The reason that rational risk aversion (which is to say, diminishing marginal utility of money) is not a money pump is that you have to reduce risk every time you extract some expected cash, and that cannot happen forever.
Ultimately, then, prospect theory and related work are useful in understanding human decision-making but not in improving it.
VNM utility is a necessary consequence of its axioms but doesn’t entail a unique utility function; as such, the ability to prevent Dutch Books is derived more from VNM’s assumption of a fixed total ordering of outcomes than anything.
The standard argument against anything other than EU maximization (note that consistent loss-aversion may arise from diminishing marginal utility of money; loss-aversion only is interesting when directionally inconsistent) in economics involves Dutch-booking: the ability to set people up as money pumps and extract money from them by repeatedly offering subjectively preferred choices that violate transitivity. Essentially, EU maximization might be something we want to have because it induces consistency in decision-making.
For instance, imagine a preference ordering like the one in Nick_Tarleton’s adjacent comment, where +10 is different from +20-10. Let us say that +9=+20-10 (without loss of generality; just pick a number on the left side).
Then I can offer you +9 in exchange for +20-10 repeatedly, and you’ll prefer it every time, but you ultimately lose money.
The reason that rational risk aversion (which is to say, diminishing marginal utility of money) is not a money pump is that you have to reduce risk every time you extract some expected cash, and that cannot happen forever.
Ultimately, then, prospect theory and related work are useful in understanding human decision-making but not in improving it.
Question—is there a uniqueness proof of VNM optimality in this regard?
VNM utility is a necessary consequence of its axioms but doesn’t entail a unique utility function; as such, the ability to prevent Dutch Books is derived more from VNM’s assumption of a fixed total ordering of outcomes than anything.