Lottery-Dependent Utility via Stochastic Benchmarking

Paola Modesti ()

Theory and Decision, 2003, vol. 55, issue 1, 45-57

Abstract: The possibility to interpret expected and nonexpected utility theories in purely probabilistic terms has been recently investigated. Such interpretation proposes as guideline for the Decision Maker the comparison of random variables through their probability to outperform a stochastic benchmark. We apply this type of analysis to the model of Becker and Sarin, showing that their utility functional may be seen as the probability that an opportune random variable, depending on the one to be evaluated, does not outperform a non-random benchmark. Further, the consequent choice criterion is equivalent to a sort of probability of ruin. Possible interpretations and financial examples are discussed.

Date: 2003
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