Are CEOs Expected Utility Maximizers?

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Executive Summary

This paper represents much more than academic curiosity. In a normative sense, at stake are the fundamental underpinnings of the bulk of the last half-century's models of choice under uncertainty. From a positive perspective, the ubiquitous use of benefit-cost analysis across government agencies renders the expected utility maximization paradigm literally the only game in town. In this paper, the authors advance the literature by exploring CEO's preferences over small probability, high loss lotteries. Using undergraduate students as the experimental control group, they find that both the CEO and student subject pools exhibit frequent and large departures from expected utility theory.

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