Consistent Indices

Ran Shorrer

Working Paper from Harvard University OpenScholar

Abstract: In many decision problems, agents base their actions on a simple objective index, a single number that summarizes the available information about objects of choice independently of their particular preferences. This paper proposes an axiomatic approach for deriving an index which is objective and, nevertheless, can serve as a guide for decision making for decision makers with different preferences. Unique indices are derived for five decision making settings: the Aumann and Serrano (2008) index of riskiness (additive gambles), a novel generalized Sharpe ratio (for a standard portfolio allocation problem), Schreiber's (2013) index of relative riskiness (multiplicative gambles), a novel index of delay embedded in investment cashflows (for a standard capital budgeting problem), and the index of appeal of information transactions (Cabrales et al., 2014). All indices share several attractive properties in addition to satisfying the axioms. The approach may be applicable in other settings in which indices are needed.

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