ECONOMIC GROWTH CENTER

                YALE UNIVERSITY

                P.O. Box 208269
              27 Hillhouse Avenue
            New Haven, CT 06520-8269



          CENTER DISCUSSION PAPER NO. 774




          AN OUTCOME-ORIENTED THEORY OF CHOICE
              AND EMPIRICAL PARADOXES IN
                EXPECTED UTILITY THEORY



                    Fumihiro Kaneko
                    Yale University



                        May 1997








Note:  Center Discussion Papers are preliminary materials circulated to
       stimulate discussions and critical comments.  Dr. Kaneko is a Ph.D.
       candidate in the Department of Economics.

   An Outcome-Oriented Theory of Choice and Empirical Paradoxes
                   in Expected Utility Theory



                       Fumihiro Kaneko*
                    Department of Economics
                       Yale University
                        12 May 1997



                           Abstract

   I analyze observed choice between lotteries from an outcome-oriented point
of view in the framework of choice between random variables.  I characterize
a choice maker, who faces a choice situation between lotteries, by
(1) a surmising process that associates, with a pair of lotteries, a set of
well-defined choice situations between random variables, and (2) a choice
set that is a collection of well-defined choice situations.  I give a partial
axiomatic foundation of the theory.  The theory is applied to explain the
well-known paradoxes in expected utility theory.


Keywords:  Expected Utility Theory, SSA Representation, SSB Representation,
           Prospect Theory, Choice under Uncertainty










________________________
   *The author thanks Professors Donald Brown, Truman Bewley, David Pearce,
Dilip Abreu, and other participants of the seminar in Yale University for
very helpful comments.