The Shape of Utility Functions and Organizational Behavior

Authors:
Joost M. E. Pennings;Ale Smidts
Affiliations:
-;-
Venue:
Management Science
Year:
2003

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Abstract

Based on measurements among 332 owner-managers, we investigate how theglobal shape of the utility function (i.e., S-shaped versus concave or convex over the total range of outcomes) relates to choice behavior. We find that the global shape of the utility function differs across decision makers (about one-third of the owner-managers exhibit an S-shaped utility function) and that the global shape is linked to organizational behavior (i.e., the production system employed), a result that does not change when using different methods to identify the decision maker's global shape of the utility function. The decision maker's risk attitude (risk averse or risk seeking) does not affect the choice of the production system. Whereas the degree of risk aversion, based on thelocal shape of the utility function, may be important in explaining owner-managers' trading behavior (Pennings and Smidts 2000), more structural organizational behavior appears to be linked to theglobal shape of the utility function.