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Peter P Wakker - One of the best experts on this subject based on the ideXlab platform.
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Prospect theory for continuous distributions: A preference foundation
Journal of Risk and Uncertainty, 2011Co-Authors: Amit Kothiyal, Vitalie Spinu, Peter P WakkerAbstract:Preference foundations give necessary and sufficient conditions for a decision model, stated directly in terms of the empirical primitive: the preference relation. For the most popular descriptive model for decision making under risk and uncertainty today, prospect theory, preference foundations have as yet been provided only for prospects taking finitely many values. In applications, however, prospects often are complex and involve infinitely many values, as in normal and lognormal distributions. This paper provides a preference foundation of prospect theory for such complex prospects. We allow for unbounded Utility and only require finite additivity of the underlying probability distributions, leaving the restriction to countably additive distributions optional. As corollaries, we generalize previously obtained preference foundations for special cases of prospect theory (Rank-Dependent Utility and Choquet expected Utility) that all required countable additivity. We now obtain genuine generalizations of de Finetti’s and Savage’s finitely additive setups to unbounded Utility.
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DOI 10.1007/s11166-011-9118-0 Prospect theory for continuous distributions: A preference foundation
2011Co-Authors: Amit Kothiyal, Vitalie Spinu, Peter P WakkerAbstract:© The Author(s) 2011. This article is published with open access at Springerlink.com Abstract Preference foundations give necessary and sufficient conditions for a decision model, stated directly in terms of the empirical primitive: the pref-erence relation. For the most popular descriptive model for decision making under risk and uncertainty today, prospect theory, preference foundations have as yet been provided only for prospects taking finitely many values. In applications, however, prospects often are complex and involve infinitely many values, as in normal and lognormal distributions. This paper provides a prefer-ence foundation of prospect theory for such complex prospects. We allow for unbounded Utility and only require finite additivity of the underlying proba-bility distributions, leaving the restriction to countably additive distributions optional. As corollaries, we generalize previously obtained preference founda-tions for special cases of prospect theory (Rank-Dependent Utility and Choquet expected Utility) that all required countable additivity. We now obtain gen-uine generalizations of de Finetti’s and Savage’s finitely additive setups to unbounded Utility
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prospect theory for risk and ambiguity
2010Co-Authors: Peter P WakkerAbstract:Preface Introduction Part I. Expected Utility: 1. The general model of decision under uncertainty no-arbitrage (expected Utility with known utilities and unknown probabilities) 2. Expected Utility with known probabilities - 'risk' - and unknown utilities 3. Applications of expected Utility for risk 4. Expected Utility with unknown probabilities and unknown utilities Part II. Nonexpected Utility for Risk: 5. Heuristic arguments for probabilistic sensitivity and rank dependence 6. Probabilistic sensitivity and rank dependence analyzed 7. Applications and extensions of rank dependence 8. Where prospect theory deviates from Rank-Dependent Utility and expected Utility: reference dependence versus asset integration 9. Prospect theory for decision under risk Part III. Nonexpected Utility for Uncertainty: 10. Extending Rank-Dependent Utility from risk to uncertainty 11. Ambiguity: where uncertainty extends beyond risk 12. Prospect theory for uncertainty 13. Conclusion Appendices References Index.
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eliciting von neumann morgenstern utilities when probabilities are distorted or unknown
Management Science, 1996Co-Authors: Peter P Wakker, Daniel DeneffeAbstract:This paper proposes a new method, the gamble-tradeoff method, for eliciting utilities in decision under risk or uncertainty. The elicitation of utilities, to be used in the expected Utility criterion, turns out to be possible even if probabilities are ambiguous or unknown. A disadvantage of the tradeoff method is that a few more questions usually must be asked to clients. Also, the lotteries that are needed are somewhat more complex than in the certainty-equivalent method or in the probability-equivalent method. The major advantage of the tradeoff method is its robustness against probability distortions and misconceptions, which constitute a major cause of violations of expected Utility and generate inconsistencies in Utility elicitation. Thus the tradeoff method retains full validity under prospect theory, Rank-Dependent Utility, and the combination of the two, i.e., cumulative prospect theory. The tradeoff method is tested for monetary outcomes and for outcomes describing life-duration. We find higher risk aversion for life duration, but the tradeoff method elicits similar curvature of Utility. Apparently the higher risk aversion for life duration is due to more pronounced deviations from expected Utility.
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eliciting von neumann morgenstern utilities when probabilities are distorted or unknown
ERIM Top-Core Articles, 1996Co-Authors: Peter P Wakker, Daniel DeneffeAbstract:textabstractThis paper proposes a new method, the (gamble-)tradeoff method, for eliciting utilities in decision under risk or uncertainty. The elicitation of utilities, to be used in the expected Utility criterion, turns out to be possible even if probabilities are ambiguous or unknown. A disadvantage of the tradeoff method is that a few more questions usually must be asked to clients. Also, the lotteries that are needed are somewhat more complex than in the certainty-equivalent method or in the probability-equivalent method. The major advantage of the tradeoff method is its robustness against probability distortions and misconceptions, which constitute a major cause of violations of expected Utility and generate inconsistencies in Utility elicitation. Thus the tradeoff method retains full validity under prospect theory, Rank-Dependent Utility, and the combination of the two, i.e., cumulative prospect theory. The tradeoff method is tested for monetary outcomes and for outcomes describing life-duration. We find higher risk aversion for life duration, but the tradeoff method elicits similar curvature of Utility. Apparently the higher risk aversion for life duration is due to more pronounced deviations from expected Utility.
Mohammed Abdellaoui - One of the best experts on this subject based on the ideXlab platform.
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a genuine rank dependent generalization of the von neumann morgenstern expected Utility theorem
Econometrica, 2002Co-Authors: Mohammed AbdellaouiAbstract:This paper uses "revealed probability trade-offs" to provide a natural foundation for probability weighting in the famous von Neumann and Morgenstern axiomatic set-up for expected Utility. In particular, it shows that a Rank-Dependent preference functional is obtained in this set-up when the independence axiom is weakened to stochastic dominance and a probability trade-off consistency condition. In contrast with the existing axiomatizations of Rank-Dependent Utility, the resulting axioms allow for complete flexibility regarding the outcome space. Consequently, a parameter-free test/elicitation of Rank-Dependent Utility becomes possible. The probability-oriented approach of this paper also provides theoretical foundations for probabilistic attitudes towards risk. It is shown that the preference conditions that characterize the shape of the probability weighting function can be derived from simple probability trade-off conditions. Copyright The Econometric Society 2002.
Patrick Eozenou - One of the best experts on this subject based on the ideXlab platform.
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measuring risk attitudes among mozambican farmers
Journal of Development Economics, 2014Co-Authors: Alan De Brauw, Patrick EozenouAbstract:Although farmers in developing countries are generally thought to be risk averse, little is known about the actual form of their risk preferences. In this paper, we use a relatively large lab-in-the-field experiment to explore risk preferences related to sweet potato production among a sample of farmers in northern Mozambique. A unique feature of this experiment is that it includes a large subsample of husband and wife pairs. After exploring correlations between husband and wife preferences, we explicitly test whether preferences follow the constant relative risk aversion (CRRA) Utility function, and whether farmers follow expected Utility theory or rank dependent Utility theory in generating their preferences. We reject the null hypothesis that farmers' preferences follow the CRRA Utility function, in favor of the more flexible power risk aversion preferences. If we make the common CRRA assumption in our sample, we poorly predict risk preferences among those who are less risk averse.
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measuring risk attitudes among mozambican farmers
2011Co-Authors: Alan De Brauw, Patrick EozenouAbstract:Although farmers in developing countries are generally thought to be risk averse, little is known about the actual form of their risk preferences. In this paper, we use a relatively large field experiment to explore risk preferences related to sweet potato production among a sample of farmers in northern Mozambique. We explicitly test whether preferences follow the constant relative risk aversion (CRRA) Utility function and whether farmers follow expected Utility theory or rank dependent Utility theory in generating their preferences. We find that we can reject the null that farmers'preferences follow the CRRA Utility function in favor of the more flexible power risk aversion preferences. In a mixture model, we find that about three-fourths of farmers in our sample develop risk preferences by rank dependent Utility. We also find that by making the common CRRA assumption in our sample, we poorly predict risk preferences among those who are less risk averse.
Daniel Deneffe - One of the best experts on this subject based on the ideXlab platform.
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eliciting von neumann morgenstern utilities when probabilities are distorted or unknown
Management Science, 1996Co-Authors: Peter P Wakker, Daniel DeneffeAbstract:This paper proposes a new method, the gamble-tradeoff method, for eliciting utilities in decision under risk or uncertainty. The elicitation of utilities, to be used in the expected Utility criterion, turns out to be possible even if probabilities are ambiguous or unknown. A disadvantage of the tradeoff method is that a few more questions usually must be asked to clients. Also, the lotteries that are needed are somewhat more complex than in the certainty-equivalent method or in the probability-equivalent method. The major advantage of the tradeoff method is its robustness against probability distortions and misconceptions, which constitute a major cause of violations of expected Utility and generate inconsistencies in Utility elicitation. Thus the tradeoff method retains full validity under prospect theory, Rank-Dependent Utility, and the combination of the two, i.e., cumulative prospect theory. The tradeoff method is tested for monetary outcomes and for outcomes describing life-duration. We find higher risk aversion for life duration, but the tradeoff method elicits similar curvature of Utility. Apparently the higher risk aversion for life duration is due to more pronounced deviations from expected Utility.
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eliciting von neumann morgenstern utilities when probabilities are distorted or unknown
ERIM Top-Core Articles, 1996Co-Authors: Peter P Wakker, Daniel DeneffeAbstract:textabstractThis paper proposes a new method, the (gamble-)tradeoff method, for eliciting utilities in decision under risk or uncertainty. The elicitation of utilities, to be used in the expected Utility criterion, turns out to be possible even if probabilities are ambiguous or unknown. A disadvantage of the tradeoff method is that a few more questions usually must be asked to clients. Also, the lotteries that are needed are somewhat more complex than in the certainty-equivalent method or in the probability-equivalent method. The major advantage of the tradeoff method is its robustness against probability distortions and misconceptions, which constitute a major cause of violations of expected Utility and generate inconsistencies in Utility elicitation. Thus the tradeoff method retains full validity under prospect theory, Rank-Dependent Utility, and the combination of the two, i.e., cumulative prospect theory. The tradeoff method is tested for monetary outcomes and for outcomes describing life-duration. We find higher risk aversion for life duration, but the tradeoff method elicits similar curvature of Utility. Apparently the higher risk aversion for life duration is due to more pronounced deviations from expected Utility.
Peizhen Ding - One of the best experts on this subject based on the ideXlab platform.
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rank dependent Utility maximization under risk exposure constraint
Social Science Research Network, 2017Co-Authors: Peizhen DingAbstract:This paper analyzes the optimal investment policies of Rank-Dependent Utility maximizing investor who must manage the risk exposure using a general law- invariant risk measure such as Value-at-Risk and tail Value-at-Risk. The analytic optimal solution is obtained via the so-called quantile formulation and relaxation method. We find that the investor must control the risk exposure when he/she has not enough money to invest or the constraint is very restrictive.
