Related papers: Background risk and small-stakes risk aversion
Random utility theory models an agent's preferences on alternatives by drawing a real-valued score on each alternative (typically independently) from a parameterized distribution, and then ranking the alternatives according to scores. A…
We pursue an inverse approach to utility theory and consumption & investment problems. Instead of specifying an agent's utility function and deriving her actions, we assume we observe her actions (i.e. her consumption and investment…
This paper introduces a rule for policy selection in the presence of estimation uncertainty, explicitly accounting for estimation risk. The rule belongs to the class of risk-aware rules on the efficient decision frontier, characterized as…
Desirability can be understood as an extension of Anscombe and Aumann's Bayesian decision theory to sets of expected utilities. At the core of desirability lies an assumption of linearity of the scale in which rewards are measured. It is a…
Motivated by several classic decision-theoretic paradoxes, and by analogies with the paradoxes which in physics motivated the development of quantum mechanics, we introduce a projective generalization of expected utility along the lines of…
DeMarzo et al. (2005) consider auctions in which bids are selected from a completely ordered family of securities whose values are tied to the resource being auctioned. The paper defines a notion of relative steepness of families of…
This paper empirically analyzes how individual characteristics are associated with risk aversion, loss aversion, time discounting, and present bias. To this end, we conduct a large-scale demographically representative survey across eight…
A range of empirical puzzles in finance has been explained as a consequence of traders being averse to ambiguity. Ambiguity averse traders can behave in financial portfolio problems in ways that cannot be rationalized as maximizing…
How should well-being be prioritised in society, and what trade-offs are people willing to make between fairness and personal well-being? We investigate these questions using a stated preference experiment with a nationally representative…
Cooperative dynamics are central to our understanding of many phenomena in living and complex systems. However, we lack a universal mechanism to explain the emergence of cooperation. We present a novel framework for modelling social dilemma…
Economists often estimate economic models on data and use the point estimates as a stand-in for the truth when studying the model's implications for optimal decision-making. This practice ignores model ambiguity, exposes the decision…
We provide an axiomatic characterization of lexicographic preferences over the set of all random availability functions using two assumptions. The first assumption is strong monotonicity, which in our framework is equivalent to the strong…
Credit ratings are widely used by investors as a screening device. We introduce and study several natural notions of risk consistency that promote prudent investment decisions in the framework of Choquet rating criteria. Three closely…
This work presents an asset pricing model that under rational expectation equilibrium perspective shows how, depending on risk aversion and noise volatility, a risky-asset has one equilibrium price that differs in term of efficiency: an…
Experiments on decision making under uncertainty are known to display a classical pattern of risk aversion and risk seeking referred to as "fourfold pattern" (or "reflection effect") , but recent experiments varying the speed and order of…
The choice of admissible trading strategies in mathematical modelling of financial markets is a delicate issue, going back to Harrison and Kreps (1979). In the context of optimal portfolio selection with expected utility preferences this…
Policy learning algorithms are widely used in areas such as personalized medicine and advertising to develop individualized treatment regimes. However, most methods force a decision even when predictions are uncertain, which is risky in…
The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate, in the context of bounded financial positions, the class of…
Completeness and transitivity are standard rationality conditions in economics. However, under ambiguity, decision makers sometimes violate these requirements because of the difficulty of forming accurate predictions about ambiguous events.…
It is common to encounter the situation with uncertainty for decision makers (DMs) in dealing with a complex decision making problem. The existing evidence shows that people usually fear the extreme uncertainty named as the unknown. This…