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Risky Curves: From Unobservable Utility to Observable Opportunity Sets

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  • Friedman, Dan
  • Sunder, Shyam

Abstract

Most theories of risky choice postulate that a decision maker maximizes the expectationof a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and concludethat no such functions have yet been found that are useful for out-of-sample prediction. Nor dowe find practical applications of Bernoulli functions in major risk-based industries such asfinance, insurance and gambling. We sketch an alternative approach to modeling risky choicethat focuses on potentially observable opportunities rather than on unobservable Bernoullifunctions.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt36q158jt.

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Date of creation: 06 Jun 2011
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Handle: RePEc:cdl:ucscec:qt36q158jt

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Keywords: Social and Behavioral Sciences; expected utility; risk aversion; St. Petersburg Paradox; decisions under uncertainty; option theory;

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Cited by:
  1. Blanco, Mariana & Engelmann, Dirk & Normann, Hans Theo, 2011. "A within-subject analysis of other-regarding preferences," Games and Economic Behavior, Elsevier, vol. 72(2), pages 321-338, June.
  2. Blanco, Mariana & Engelmann, Dirk & Koch, Alexander K. & Normann, Hans-Theo, 2008. "Belief Elicitation in Experiments: Is there a Hedging Problem?," IZA Discussion Papers 3517, Institute for the Study of Labor (IZA).
  3. Amar Cheema & Peter Leszczyc & Rajesh Bagchi & Richard Bagozzi & James Cox & Utpal Dholakia & Eric Greenleaf & Amit Pazgal & Michael Rothkopf & Michael Shen & Shyam Sunder & Robert Zeithammer, 2005. "Economics, Psychology, and Social Dynamics of Consumer Bidding in Auctions," Marketing Letters, Springer, vol. 16(3), pages 401-413, December.
  4. Charness, Gary & Gneezy, Uri & Imas, Alex, 2013. "Experimental methods: Eliciting risk preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 87(C), pages 43-51.
  5. Shyam Sunder, 2006. "Determinants of Economic Interaction: Behavior or Structure," Journal of Economic Interaction and Coordination, Springer, vol. 1(1), pages 21-32, May.

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