Payoff Kinks in Preferences over Lotteries

Mark Machina ()

Journal of Risk and Uncertainty, 2001, vol. 23, issue 3, 207-60

Abstract: This paper identifies two distinct types of payoff kinks that can be exhibited by preference functions over monetary lotteries--"locally separable" vs. "locally nonseparable"--and illustrates their relationship to the payoff and probability derivatives of such functions. Expected utility and Frechet differentiable preference functions are found to be incapable of exhibiting locally nonseparable payoff kinks; rank-dependent preference functions are incapable of avoiding them. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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