Evidence exists that people do not always make decisions involving uncertain monetary rewards as if they were maximizing expected utility of final assets. Explanations for this behavior postulate that the cognitive demands of consistency to such a theory are too great. However, situations exist in which more than mental shortcuts are involved and these anomalies raise questions about expected utility theory as a guide to behavior. This paper explores the possibility that expected utility theory appears to fail because the single outcome descriptor—money—is not sufficient. After making a decision under uncertainty, a person may discover, on learning the relevant outcomes, that another alternative would have been preferable. This knowledge may impart a sense of loss, or regret. The decision maker who is prepared to tradeoff financial return in order to avoid regret will exhibit some of the behavioral paradoxes of decision theory. By explicitly incorporating regret, expected utility theory not only becomes a better descriptive predictor but also may become a more convincing guide for prescribing behavior to decision makers.

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Decision analysis requires that two equally desirable consequences should have the same utility and vice versa. Most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred However, winning the top prize of $10,000 in a lottery may leave one much happier than receiving $10,000 as the lowest prize in a lottery. This paper explores the implications of disappointment, a psychological reaction caused by comparing the actual outcome of a lottery to one's prior expectations, for decision making under uncertainty. Explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes, and suggests that decision makers may be sensitive to the manner in which a lottery is resolved. The concept of disappointment is integrated into utility theory in a prescriptive model.

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