Subjective risk and disappointment
AbstractIf 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00747902.
Date of creation: Dec 2012
Date of revision:
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00747902
Contact details of provider:
Web page: http://hal.archives-ouvertes.fr/
Disappointment; risk-aversion; subjective risk; risk premium; expected utility.;
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- 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.
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 323-343, December.
- Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, Econometric Society, vol. 59(3), pages 667-86, May.
- 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.
- 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.
- GRANT, Simon & KAJII, Atsushi, 1994. "Ausi Expected Utility : An Anticipated Utility Theory of Relative Disappointment Aversion," CORE Discussion Papers, UniversitÃ© catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1994045, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- 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.
- 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.
- Joao L. Becker & Rakesh K. Sarin, 1987. "Lottery Dependent Utility," Management Science, INFORMS, INFORMS, vol. 33(11), pages 1367-1382, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD).
If references are entirely missing, you can add them using this form.