The Simplest Non-Expected Utility Model for Lottery and Portfolio Choices

Butler Richard () and Lambson Val ()
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Butler Richard: Department of Economics, Brigham Young University, Provo, USA
Lambson Val: Brigham Young University, Provo, USA

Asia-Pacific Journal of Risk and Insurance, 2018, vol. 12, issue 1, 36

Abstract: This paper explores a particularly simple model of choice under risk, based on geometric means and entropy. Despite its simplicity, it satisfies various prudence and risk aversion conditions, is consistent with the Allais paradox, and generates various insurance-related results. Within a portfolio framework with compounded reinvestments, our index fits the risks/rewards data from post-war US stock market returns and recent international markets, at least as well as does the standard deviation measures more typically used. It also generates returns that are consistent with the equity premium puzzle.

Keywords: empirical portfolio choice; theoretical asset choice; non-expected utility model (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/apjri-2017-0006

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