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Rethinking Risk: Aspiration as Pure Risk

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Author Info
Davies, G.B.
Abstract

There exists no satisfactory theory of risk in current normative decision theories. Notions based on utility curvature, loss aversion and probability weighting are derivative, cannot be applied to non-numerical consequences, and are not psychologically intuitive. I develop a Pure Risk theory which resolves these problems, is consistent with existing normative theories, and both internalises and generalises the intuitive notion of risk being related to the probability of not achieving one’s aspirations. The theory shows that existing models are misspecifed. Effects hitherto modelled as loss aversion or utility curvature may be due instead to Pure Risk.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0507.

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Length: 71
Date of creation: Jan 2005
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Handle: RePEc:cam:camdae:0507

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Related research
Keywords: Risk; Pure Risk; Aspiration Levels; Subjective Expected Utility Theory; Prospect Theory; Pure Risk Prospect Theory;

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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