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Subjective risk and disappointment

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  • Thierry Chauveau

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

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    Abstract

    If an investor does care for utilities -and not for monetary outcomes- stochastic dominances should be expressed in terms of utility units ("utils"). If so, any "rational" investor may be characterized by an elementary utility function -called canonical utility function- which is such that the partial weak order induced by stochastic dominance over utils is as "close" to the weak order of preferences as possible. As a consequence, the random utilities of the available prospects do not violate the second-order stochastic dominance property. Substituting utils for monetary units leads to substitute "subjective" risk for "objective" risk à la Rothschild and Stiglitz (1970). A weakened independence axiom may them be set over comparable prospects, i.e. those which exhibit the same canonical expected utility. This leads to a fully choice-based theory of disappointment. The functional is lottery-dependent (Becker and Sarin 1987). When constant marginal utility is assumed, it is but the opposite to a convex measure of risk (Föllmer and Schied 2002). It may be viewed as a theoretical justification for choosing this measure of risk.

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    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00747902.

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    Date of creation: Dec 2012
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    Handle: RePEc:hal:cesptp:halshs-00747902

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    Related research

    Keywords: Disappointment; risk-aversion; subjective risk; risk premium; expected utility.;

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    References

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    1. van Dijk, Wilco W. & Zeelenberg, Marcel & van der Pligt, Joop, 2003. "Blessed are those who expect nothing: Lowering expectations as a way of avoiding disappointment," Journal of Economic Psychology, Elsevier, Elsevier, vol. 24(4), pages 505-516, August.
    2. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(2), pages 332-382, June.
    3. Jia, Jianmin & Dyer, James S & Butler, John C, 2001. " Generalized Disappointment Models," Journal of Risk and Uncertainty, Springer, Springer, vol. 22(1), pages 59-78, January.
    4. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 323-343, December.
    5. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 667-86, May.
    6. Jianmin Jia & James S. Dyer, 1996. "A Standard Measure of Risk and Risk-Value Models," Management Science, INFORMS, INFORMS, vol. 42(12), pages 1691-1705, December.
    7. Grant, Simon & Kajii, Atsushi, 1998. "AUSI expected utility: An anticipated utility theory of relative disappointment aversion," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 37(3), pages 277-290, November.
    8. Philippe Delquié & Alessandra Cillo, 2006. "Disappointment without prior expectation: a unifying perspective on decision under risk," Journal of Risk and Uncertainty, Springer, Springer, vol. 33(3), pages 197-215, December.
    9. Loomes, Graham & Sugden, Robert, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(2), pages 271-82, April.
    10. Joao L. Becker & Rakesh K. Sarin, 1987. "Lottery Dependent Utility," Management Science, INFORMS, INFORMS, vol. 33(11), pages 1367-1382, November.
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