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Rethinking Risk: Aspiration as Pure Risk

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  • 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.

Suggested Citation

  • Davies, G.B., 2005. "Rethinking Risk: Aspiration as Pure Risk," Cambridge Working Papers in Economics 0507, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0507
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    More about this item

    Keywords

    Risk; Pure Risk; Aspiration Levels; Subjective Expected Utility Theory; Prospect Theory; Pure Risk Prospect Theory;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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