Subjective risk and disappointment

Thierry Chauveau ()
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Thierry Chauveau: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.cnrs.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: If an investor does care for utilities –and not for monetary outcomes– stochastic dominances should be expressed in terms of utility units ("utils"). If so, any "rational" investor may be characterized by an elementary utility function –called canonical utility function– which is such that the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible. As a consequence, the random utilities of the available prospects do not violate the second-order stochastic dominance property. Substituting utils for monetary units leads to substitute "subjective" risk for "objective" risk à la Rothschild and Stiglitz (1970). A weakened independence axiom may them be set over comparable prospects, i.e. those which exhibit the same canonical expected utility. This leads to a fully choice-based theory of disappointment. The functional is lottery-dependent (Becker and Sarin 1987). When constant marginal utility is assumed, it is but the opposite to a convex measure of risk (Föllmer and Schied 2002). It may be viewed as a theoretical justification for choosing this measure of risk

Keywords: Disappointment; risk-aversion; subjective risk; risk premium; expected utility (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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