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On the Intuition of Rank-Dependent Utility

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  • Diecidue, E.
  • Wakker, P.P.

    (Tilburg University, Center for Economic Research)

Abstract

Among the most popular models for decision under risk and uncertainty are the rank-dependent models, introduced by Quiggin and Schmeidler.Central concepts in these models are rank-dependence and comonotonicity.It has been suggested in the literature that these concepts are technical tools that have no intuitive or empirical content.This paper describes such contents.As a result, rank-dependence and comonotonicity become natural concepts upon which preference conditions, empirical tests, and improvements for utility measurement can be based.Further, a new derivation of the rank-dependent models is obtained.It is not based on observable preference axioms or on empirical data, but naturally follows from the intuitive perspective assumed.We think that the popularity of the rank-dependent theories is mainly due to the natural concepts adopted in these theories.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-74.

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Date of creation: 2000
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Handle: RePEc:dgr:kubcen:200074

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Web page: http://center.uvt.nl

Related research

Keywords: rank-dependence; comonotonicity; Choquet integral; pessimism; uncertainty aversion; prospect theory;

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