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Payoff Kinks in Preferences over Lotteries

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  • Machina, Mark J

Abstract

This paper identifies two distinct types of payoff kinks that can be exhibited by preference functions over monetary lotteries--"locally separable" vs. "locally nonseparable"--and illustrates their relationship to the payoff and probability derivatives of such functions. Expected utility and Frechet differentiable preference functions are found to be incapable of exhibiting locally nonseparable payoff kinks; rank-dependent preference functions are incapable of avoiding them. Copyright 2001 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 23 (2001)
Issue (Month): 3 (November)
Pages: 207-60

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Handle: RePEc:kap:jrisku:v:23:y:2001:i:3:p:207-60

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Cited by:
  1. Fabio Maccheroni & Massimo Marinacci & Doriana Ruffino, 2011. "Does Uncertainty Vanish in the Small? The Smooth Ambiguity Case," Working Papers 391, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Robert G. Chambers & John Quiggin, 2006. "Dual Approaches to the Analysis of Risk Aversion," Risk & Uncertainty Working Papers WPR06_1, Risk and Sustainable Management Group, University of Queensland.
  3. Kam Yu, 2008. "Measuring the Output and Prices of the Lottery Sector: An Application of Implicit Expected Utility Theory," NBER Working Papers 14020, National Bureau of Economic Research, Inc.
  4. Edi Karni & Zvi Safra, 2008. "Moral sentiments and social choice," Social Choice and Welfare, Springer, vol. 30(3), pages 427-446, April.
  5. Sujoy Mukerji & Jean-Marc Tallon, 2002. "Ellsberg`s 2-Color Experiment, Bid-Ask Behavior and Ambiguity," Economics Series Working Papers 114, University of Oxford, Department of Economics.
  6. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
  7. Safra, Zvi & Segal, Uzi, 2002. "On the Economic Meaning of Machina's Frechet Differentiability Assumption," Journal of Economic Theory, Elsevier, vol. 104(2), pages 450-461, June.
  8. Edi Karni & Zvi Safra, 2003. "Moral Sentiments and Social Choice: Fairness Considerations in University Admissions," Economics Working Paper Archive 492, The Johns Hopkins University,Department of Economics.
  9. Frank Milne & Edwin Neave, 2003. "A General Equilibrium Financial Asset Economy with Transaction Costs and Trading Constraints," Working Papers 1082, Queen's University, Department of Economics.
  10. Liang Zou, 2006. "An Alternative to Prospect Theory," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 1-28, May.
  11. Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.

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