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Decision Making Based on Risk-Value Tradeoffs

In: The Mathematics of Preference, Choice and Order

Author

Listed:
  • Jianmin Jia

    (The University of Texas at Austin)

  • James S. Dyer

    (The Chinese University of Hong Kong)

Abstract

This essay provides a review for measures of risk and risk-value models that we have developed for the past ten years. Risk-value models are a new class of decision making models based on the idea of risk-value tradeoffs. Intuitively, individuals may consider their choices over risky alternatives by trading off between risk and return, where return is typically measured as the mean (or expected return) and risk is measured by some indicator of dispersion or possible losses. This notion is prevalent in the literatures in finance, marketing and other areas. Markowitz (1959, 1987, 1991) proposed variance as a measure of risk, and a mean-variance model for portfolio selection based on minimizing variance subject to a given level of mean return. But arguments have been made that mean-variance models are appropriate only if the investor's utility function is quadratic or the joint distribution of returns is normal. However, these conditions are rarely satisfied in practice.

Suggested Citation

  • Jianmin Jia & James S. Dyer, 2009. "Decision Making Based on Risk-Value Tradeoffs," Studies in Choice and Welfare, in: Steven J. Brams & William V. Gehrlein & Fred S. Roberts (ed.), The Mathematics of Preference, Choice and Order, pages 59-72, Springer.
    • Handle: RePEc:spr:stcchp:978-3-540-79128-7_4
    DOI: 10.1007/978-3-540-79128-7_4
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    Cited by:

    1. He, Ying & Dyer, James S. & Butler, John C. & Jia, Jianmin, 2019. "An additive model of decision making under risk and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 78-92.

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