Related papers: Background risk and small-stakes risk aversion
We consider the psychological effect of preference reversal and show that it finds a natural explanation in the frame of quantum decision theory. When people choose between lotteries with non-negative payoffs, they prefer a more certain…
We experimentally study a game in which success requires a sufficient total contribution by members of a group. There are significant uncertainties surrounding the chance and the total effort required for success. A theoretical model with…
A speculative agent with Prospect Theory preference chooses the optimal time to purchase and then to sell an indivisible risky asset to maximize the expected utility of the round-trip profit net of transaction costs. The optimization…
Return-risk models are the two pillars of modern portfolio theory, which are widely used to make decisions in choosing the loan portfolio of a bank. Banks and other financial institutions are subjected to limited liability protection.…
We define notions of cautiousness and cautious belief to provide epistemic conditions for iterated admissibility in finite games. We show that iterated admissibility characterizes the behavioral implications of "cautious rationality and…
This paper analyses how risk-taking behaviour and preferences over consumption rank can emerge as a neutrally stable equilibrium when individuals face an anti-coordination task. If in an otherwise homogeneous society information about…
Gambles are random variables that model possible changes in monetary wealth. Classic decision theory transforms money into utility through a utility function and defines the value of a gamble as the expectation value of utility changes.…
The abundance of data about social relationships allows the human behavior to be analyzed as any other natural phenomenon. Here we focus on balance theory, stating that social actors tend to avoid establishing cycles with an odd number of…
This paper introduces a space of variable lotteries and proves a constructive version of the expected utility theorem. The word ``constructive'' is used here in two senses. First, as in constructive mathematics, the logic underlying proofs…
This paper examines the impact of cognitive biases on financial decision-making through a static Bayesian game framework. While traditional economic theory assumes fully rational investors, real-world choices are often shaped by loss…
We consider a stochastic game-theoretic model of an investment market in continuous time with short-lived assets and study strategies, called survival, which guarantee that the relative wealth of an investor who uses such a strategy remains…
Ranked decision systems -- recommenders, ad auctions, clinical triage queues -- must decide when to intervene in ranked outputs and when to abstain. We study when confidence-based abstention monotonically improves decision quality, and when…
In this paper we take a look at a simple portfolio insurance strategy using a protective put and computationally derive the investor's governing utility structures underlying such a strategy under alternative market scenarios. Investor…
The valuation process that economic agents undergo for investments with uncertain payoff typically depends on their statistical views on possible future outcomes, their attitudes toward risk, and, of course, the payoff structure itself.…
Contextual bandits with average-case statistical guarantees are inadequate in risk-averse situations because they might trade off degraded worst-case behaviour for better average performance. Designing a risk-averse contextual bandit is…
We study capital requirements for bounded financial positions defined as the minimum amount of capital to invest in a chosen eligible asset targeting a pre-specified acceptability test. We allow for general acceptance sets and general…
The sensitivity to risk that most people (hence, financial operators) feel affects the dynamics of financial transactions. Here we present an approach to this problem based on a current generalization of Boltzmann-Gibbs statistical…
Diffusion in a linear potential in the presence of position-dependent killing is used to mimic a default process. Different assumptions regarding transport coefficients, initial conditions, and elasticity of the killing measure lead to…
Many high-stakes AI deployments proceed only if every stakeholder deems the system acceptable relative to their own minimum standard. With randomization over a finite menu of options, this becomes a feasibility question: does there exist a…
This paper studies robust forward investment and consumption preferences within a zero-volatility context. Different from previous works, we consider an incomplete financial market model due to general investment portfolio constraints. We…