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Risk perception, risk attitude and decision: a Rank-Dependent approach

Michèle Cohen ()

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

Abstract: The classical expected utility model of decision under risk (von Neumann-Morgenstern, 1944) has been criticized from an experimental point of view (Allais' paradox) as well as for its restrictive lack of explanatory power. The Rank-Dependent Expected Utility model (RDU) model (Quiggin, 1982) attempts to answer some of these criticisms. The decision maker is characterized by two functions: a utility function on consequences measuring preferences over sure outcomes and a probability weighting function measuring the subjective weighting of probabilities. As we show and illustrate in this paper, this model allows for more diversified types of behavior: it is consistent with the behavior revealed by the Allais paradox; the decision maker could dislike risk (prefer to any lottery its expectation) without necessarily avoiding any increase in risk; diminishing marginal utility may coexists with "weak" risk seeking attitudes; decision makers with the same utility function may differ in their choices between lotteries when they have different probability weighting functions; furthemore, the same decision maker may have different, context-dependent, subjective beliefs on events

Keywords: Decision under risk; risk perception; risk aversion, Allais paradox; Rank-Dependent Expected Utility model (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe and nep-upt
Date: 2008-12
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Working Paper: Risk Perception, Risk Attitude and Decision: a Rank-Dependent Approach (2008) Downloads
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