The main focus of this article is to compare utility functions derived by the Von Neumann-Morgenstern conceptual apparatus with those imputed through actual pricing behavior. The study is cast in a competitive bidding setting in the oil drilling industry. A version of the Friedman bidding model is used to generate separate bidding models for two drilling contractors. From the actual bids submitted by the contractors and those generated by the model, one can construct each contractor's imputed utility function. An examination of a contractor's derived and imputed utility functions over a common range of outcomes then provides a diagnostic check on the veracity of the Von Neumann-Morgenstern theory as a prescriptive model of executive behavior.
INTRODUCTIONUtility theory first made its appearance in the literature three decades agoAlthough the term is one that occurs ever more frequently in management articles, books, meetings, and university classrooms, it is still unfamiliar to most practicing businessmen. This problem is compounded by the fact that very little has been reported in the way of serious research attempts to derive the actual utility functions of businessmen [ 5 , Ch. 101 [6] [ 1 I].There is some disagreement among authorities as to the proper use of utility theory. Some believe it to be descriptive of executive behavior [ 101; others insist that the theory is normative (or prescriptive), that it indicates how executives should behave rather than how they do behave [2]. In any case, there has been little research conducted with the aim of empirically validating the worth of the theory from either a descriptive or a normative point of view.This paper attempts an empirical validation of utility theory from a prescriptive viewpoint, Like Grayson's study [ 5 ] , it is cast in a competitive bidding setting in the oil drilling industry. However, while Grayson focuses solely on the derivation of personal utility functions, this study compares derived utility functions with those imputed from observable empirical information. The proposed methods of validation appear applicable for any case in which one can measure both an executive's derived and imputed risk preferences over a common range of monetary outcomes.The research discussed herein is the by-product of a much larger rnodelbuilding effort [8] which resulted in the opportunity to gain further insights into the risk attitudes of businessmen and to expand the horizons of utility theory.
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