Related papers: Background risk and small-stakes risk aversion
Prospect theory is widely viewed as the best available descriptive model of how people evaluate risk in experimental settings. According to prospect theory, people are risk-averse with respect to gains and risk-seeking with respect to…
Challenge Theory (CT), a new approach to decision under risk departs significantly from expected utility, and is based on firmly psychological, rather than economic, assumptions. The paper demonstrates that a purely cognitive-psychological…
We provide sufficient conditions under which a utility function may be recovered from a finite choice experiment. Identification, as is commonly understood in decision theory, is not enough. We provide a general recoverability result that…
An important but understudied question in economics is how people choose when facing uncertainty in the timing of events. Here we study preferences over time lotteries, in which the payment amount is certain but the payment time is…
Risk and utility functionals are fundamental building blocks in economics and finance. In this paper we investigate under which conditions a risk or utility functional is sensitive to the accumulation of losses in the sense that any…
Under mean-variance-utility framework, we propose a new portfolio selection model, which allows wealth and time both have influences on risk aversion in the process of investment. We solved the model under a game theoretic framework and…
I study robust comparative statics for risk-averse subjective expected utility (SEU) maximizers. Starting with a finite menu of actions totally ordered by sensitivity to risk, I identify the transformations of her menu that lead a…
Evidence suggests that participants in strategy-proof matching mechanisms play dominated strategies. To explain the data, we introduce expectation-based loss aversion into a school-choice setting and characterize choice-acclimating personal…
We prove an existence result for the principal-agent problem with adverse selection under general assumptions on preferences and allocation spaces. Instead of assuming that the allocation space is finite-dimensional or compact, we consider…
We provide a theoretical framework to understand how widely used measures of choice difficulty relate. In a binary-option Bayesian expected-utility framework, we show that three measures of difficulty, (i) understanding (ex-ante value),…
We provide a unifying way to analyze how risk aversion changes bidding in auctions by asking which bids become more attractive as bidders become more risk averse. In first-price auctions, under two payoff conditions--winning is never worse…
Decision-theoretic planning with risk-sensitive planning objectives is important for building autonomous agents or decision-support systems for real-world applications. However, this line of research has been largely ignored in the…
Portfolio diversification is a cornerstone of modern finance, while risk aversion is central to decision theory; both concepts are long-standing and foundational. We investigate their connections by studying how different forms of…
This paper investigates the use of risk measures and theories of choice for modeling risk-averse route choice and traffic network equilibrium with random travel times. We interpret the postulates of these theories in the context of routing,…
In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as anomalies the theory of rational finance cannot explain: Predictability of asset returns, The Equity Premium, (The…
In the gambling foundation of probability theory, rationality requires that a subject should always (never) find desirable all nonnegative (negative) gambles, because no matter the result of the experiment the subject never (always)…
An analyst observes an agent take a sequence of actions. The analyst does not have access to the agent's information and ponders whether the observed actions could be justified through a rational Bayesian model with a known utility…
We provide a formal, simple and intuitive theory of rational decision making including sequential decisions that affect the environment. The theory has a geometric flavor, which makes the arguments easy to visualize and understand. Our…
It is well known that ex ante social preferences and expected utility are not always compatible. In this note, we introduce a novel framework that naturally separates social preferences from selfish preferences to answer the following…
We provide foundations for decisions in face of unlikely events by extending the standard framework of Savage to include preferences indexed by a family of events. We derive a subjective lexicographic expected utility representation which…