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A Contextual Uncertainty Condition for Behavior Under Risk

Author

Listed:
  • David E. Bell

    (Harvard Business School, Boston, Massachusetts 02163)

Abstract

Suppose that your choice between uncertain financial prospects is made more difficult by two independent contextual uncertainties concerning the size of your existing wealth. One contextual uncertainty has a greater spread than the other. If you could resolve one of these contextual uncertainties before making your choice, would you rather it be the larger or the smaller? In this paper we explore the intuitive notion that it ought to be more advantageous to resolve larger rather than smaller contextual uncertainties. The utility function for wealth u(w) = aw - be -cw (a, b, c \ge 0) is the only utility function that satisfies this condition and that is also increasing and risk averse at all wealth levels.

Suggested Citation

  • David E. Bell, 1995. "A Contextual Uncertainty Condition for Behavior Under Risk," Management Science, INFORMS, vol. 41(7), pages 1145-1150, July.
    • Handle: RePEc:inm:ormnsc:v:41:y:1995:i:7:p:1145-1150
    DOI: 10.1287/mnsc.41.7.1145
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    Citations

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    Cited by:

    1. David E. Bell & Peter C. Fishburn, 2001. "Strong One-Switch Utility," Management Science, INFORMS, vol. 47(4), pages 601-604, April.
    2. Franke, Günter & Weber, Martin, 2001. "Heterogeneity of Investors and Asset Pricing in a Risk-Value World," CoFE Discussion Papers 01/08, University of Konstanz, Center of Finance and Econometrics (CoFE).
    3. Louis Anthony Cox, 1999. "Adaptive Spatial Sampling of Contaminated Soil," Risk Analysis, John Wiley & Sons, vol. 19(6), pages 1059-1069, December.
    4. Thomke, Stefan H., 1997. "The role of flexibility in the development of new products: An empirical study," Research Policy, Elsevier, vol. 26(1), pages 105-119, March.
    5. Craig W. Kirkwood, 2004. "Approximating Risk Aversion in Decision Analysis Applications," Decision Analysis, INFORMS, vol. 1(1), pages 51-67, March.
    6. Gregory M. Gelles & Douglas W. Mitchell, 1999. "Broadly Decreasing Risk Aversion," Management Science, INFORMS, vol. 45(10), pages 1432-1439, October.
    7. Mitchell, Douglas W. & Gelles, Gregory M., 2003. "Risk-value models: Restrictions and applications," European Journal of Operational Research, Elsevier, vol. 145(1), pages 109-120, February.
    8. Henry Stott, 2006. "Cumulative prospect theory's functional menagerie," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 101-130, March.
    9. Ilia Tsetlin & Robert L. Winkler, 2005. "Risky Choices and Correlated Background Risk," Management Science, INFORMS, vol. 51(9), pages 1336-1345, September.

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