INDIVISIBILITIES, COMMITMENTS AND EXPECTED UTILITY THEORY

This dissertation incorporates indivisibilities and commitments into expected utility theory. The derived utility functions which result have several non-concave sections even when elementary preferences are risk averse. For this reason a risk averse person with commitments may paradoxically seek risks. Indivisible or addictive goods with no close substitutes will also promote risk seeking. Drug addicts are expected to be risk seekers.;Some empirical evidence contradicts expected utility theory. The Allais and Ellsberg paradoxes are examples of such evidence. Indivisibilities and commitments used within the framework of expected utility theory cannot violate the axioms of that theory. When commitments are coupled with other factors, however, they can provide an explanation for some axiom violations. Consistent errors made by experimental subjects and regret at having to make certain choices are examples of factors which, when taken in conjunction with commitments, explain axiom violations.;The first chapter of the dissertation consists of a review of expected utility theory and a discussion of the normative role of that theory as it influences further theoretical work. The second chapter derives utility functions in the presence of indivisibilities and commitments. The pattern of preferences for wealth is compared with empirical evidence and is contrasted with alternative theoretical explanations. The third chapter discusses variations in the axioms of expected utility theory and introduces consistent errors and regret.;The utility function derived in the presence of commitments is similar to the function suggested by Markowitz (1952) and will establish itself around the subject's current wealth. For this reason derived utility functions will move over time as wealth changes, even if elementary preferences are unchanging.