An axiomatic account of status quo-dependent non-expected utility: Pragmatic constraints on rational choice under risk

Gebhard Geiger

Mathematical Social Sciences, 2008, vol. 55, issue 2, 116-142

Abstract: An axiomatic account of rational risky choice is given which makes the impact of the decision maker's economic situation on his preferences explicit. The constraints on rationality include the decision maker's aspirations, uncertainties of current wealth and income (status quo), and the dependence of risk attitudes on background risks. Preferences admit a unique explicit utility representation in a suitable normalisation of the utility scale. The utility functional is generally non-linear in the probabilities and non-separable, but otherwise mathematically simple. It explicates well-known empirical features of utility-oriented behaviour such as the Allais paradox, observed variations in risk attitude and systematic violations of betweenness.

Date: 2008
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