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Relative Risk Aversion

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  • James S. Dyer

    (University of Texas at Austin)

  • Rakesh K. Sarin

    (University of California, Los Angeles)

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    Abstract

    An individual's preference for risky alternatives is influenced by the strength of preference he feels for the consequences and his attitude toward risk taking. Conventional measures of risk attitude confound these two factors. In this paper we formally separate these factors and explore how this separation might significantly enhance our understanding of decision making under risk. We introduce a new measure of risk attitude defined relative to strength of preference. This measure is based on comparing an individual's von Neumann-Morgenstern utility function to his strength of preference function. The properties of this measure of relative risk attitude are developed. The concept of relative risk attitude has several important implications. First, it provides a better description of an individual's attitude toward risk. Second, it provides a better way to combine preferences of various experts in the context of multicriteria decision making. Finally, it provides a better insight into the implications of some commonly employed preference aggregation rules in group decision making.

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    File URL: http://dx.doi.org/10.1287/mnsc.28.8.875
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 28 (1982)
    Issue (Month): 8 (August)
    Pages: 875-886

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    Handle: RePEc:inm:ormnsc:v:28:y:1982:i:8:p:875-886

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    Related research

    Keywords: utility/preference: theory;

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    Cited by:
    1. David Parkin & Nancy Devlin, 2006. "Is there a case for using visual analogue scale valuations in cost-utility analysis?," Health Economics, John Wiley & Sons, Ltd., vol. 15(7), pages 653-664.
    2. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
    3. Abellan-Perpiñan, Jose Maria & Bleichrodt, Han & Pinto-Prades, Jose Luis, 2009. "The predictive validity of prospect theory versus expected utility in health utility measurement," Journal of Health Economics, Elsevier, vol. 28(6), pages 1039-1047, December.
    4. Loomes, Graham, 1995. "The myth of the HYE," Journal of Health Economics, Elsevier, vol. 14(1), pages 1-7, May.
    5. Fellner, Gerlinde & Maciejovsky, Boris, 2007. "Risk attitude and market behavior: Evidence from experimental asset markets," Journal of Economic Psychology, Elsevier, vol. 28(3), pages 338-350, June.
    6. Colin F. Camerer & Howard Kunreuther, 1989. "Decision processes for low probability events: Policy implications," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(4), pages 565-592.
    7. Claude Le Pen, 1997. "Théorie de l'utilité et mesure des états de santé, le débat QALYs-HYEs," Économie et Prévision, Programme National Persée, vol. 129(3), pages 37-54.
    8. Dolan, Paul, 1998. "The measurement of individual utility and social welfare," Journal of Health Economics, Elsevier, vol. 17(1), pages 39-52, January.
    9. Alan M. Garber & Charles E. Phelps, 1992. "Economic Foundations of Cost Effective Analysis," NBER Working Papers 4164, National Bureau of Economic Research, Inc.
    10. Rettinger, David A. & Hastie, Reid, 2001. "Content Effects on Decision Making," Organizational Behavior and Human Decision Processes, Elsevier, vol. 85(2), pages 336-359, July.
    11. Ulrich Schmidt & Zank Horst, 2013. "Chance Theory: A Separation of Riskless and Risky Utility," Kiel Working Papers 1874, Kiel Institute for the World Economy.
    12. Lippman, Steven A. & McCardle, Kevin F. & Tang, Christopher S., 2013. "Using Nash bargaining to design project management contracts under cost uncertainty," International Journal of Production Economics, Elsevier, vol. 145(1), pages 199-207.
    13. McCabe, Christopher & Brazier, John & Gilks, Peter & Tsuchiya, Aki & Roberts, Jennifer & O'Hagan, Anthony & Stevens, Katherine, 2006. "Using rank data to estimate health state utility models," Journal of Health Economics, Elsevier, vol. 25(3), pages 418-431, May.
    14. van Winsen, Frankwin & Wauters, Erwin & Lauwers, Ludwig H. & de Mey, Yann & Van Passel, Steven & Vancauteren, Mark, 2011. "Combining risk perception and risk attitude: A comprehensive individual risk behavior model," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115749, European Association of Agricultural Economists.
    15. Stevens, Katherine & McCabe, Christopher & Brazier, John & Roberts, Jennifer, 2007. "Multi-attribute utility function or statistical inference models: A comparison of health state valuation models using the HUI2 health state classification system," Journal of Health Economics, Elsevier, vol. 26(5), pages 992-1002, September.
    16. Morrison, Gwendolyn C., 1997. "HYE and TTO: What is the difference?," Journal of Health Economics, Elsevier, vol. 16(5), pages 563-578, October.
    17. Duncan Luce, R., 1997. "Associative joint receipts," Mathematical Social Sciences, Elsevier, vol. 34(1), pages 51-74, August.
    18. Fausti, Scott W. & Gillespie, Jeffrey M., 2006. "Measuring risk attitude of agricultural producers using a mail survey: how consistent are the methods?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), June.
    19. Schuwirth, N. & Reichert, P. & Lienert, J., 2012. "Methodological aspects of multi-criteria decision analysis for policy support: A case study on pharmaceutical removal from hospital wastewater," European Journal of Operational Research, Elsevier, vol. 220(2), pages 472-483.

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