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Generalized Expected Utility Analysis of Risk Aversion with State-Dependent Preference

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  • Karni, Edi

Abstract

In this paper the author develops measures of absolute risk aversion for preference relations on risky prospects that are state-dependent and are representable by Frechet differentiable, nonlinear, functionals. A comparative statics analysis of optimal air travel insurance coverage illustrates the usefulness of the proposed measures. It is also demonstrated that the analytical framework described above is consistent with the purchase of air travel insurance even in circumstances where expected utility theory is not. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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  • Karni, Edi, 1987. "Generalized Expected Utility Analysis of Risk Aversion with State-Dependent Preference," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 229-240, February.
    • Handle: RePEc:ier:iecrev:v:28:y:1987:i:1:p:229-40
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    References listed on IDEAS

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    1. Karni, Edi, 1983. "Risk Aversion for State-Dependent Utility Functions: Measurement and Applications," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 637-647, October.
    2. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    3. Robert Eisner & Robert H. Strotz, 1961. "Flight Insurance and the Theory of Choice," Journal of Political Economy, University of Chicago Press, vol. 69(4), pages 355-355.
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    Cited by:

    1. Mark Machina, 2004. "Almost-objective uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(1), pages 1-54, July.
    2. Robert G. Chambers & John Quiggin, 2005. "Comparative Risk Aversion for State-Dependent Preferences," Risk & Uncertainty Working Papers WP5R05, Risk and Sustainable Management Group, University of Queensland.
    3. Machina, Mark J, 2001. "Payoff Kinks in Preferences over Lotteries," Journal of Risk and Uncertainty, Springer, vol. 23(3), pages 207-260, November.
    4. Galizzi, Matteo M. & Machado, Sara R. & Miniaci, Raffaele, 2016. "Temporal stability, cross-validity, and external validity of risk preferences measures: experimental evidence from a UK representative sample," LSE Research Online Documents on Economics 67554, London School of Economics and Political Science, LSE Library.
    5. Hui Huang & Shunming Zhang, 2011. "The Distorted Theory of Rank-Dependent Expected Utility," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 233-263, November.

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