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Risk of Monetary Gambles: An Axiomatic Approach

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  • Tomer Siedner

Abstract

In this work we present five axioms for a risk-order relation defined over (monetary) gambles. We then characterize an index that satisfies all these axioms – the probability of losing money in a gamble multiplied by the expected value of such an outcome – and prove its uniqueness. We propose to use this function as the risk of a gamble. This index is continuous, homogeneous, monotonic with respect to first- and second-order stochastic dominance, and simple to calculate. We also compare our index with some other risk indices mentioned in the literature.

Suggested Citation

  • Tomer Siedner, 2015. "Risk of Monetary Gambles: An Axiomatic Approach," Discussion Paper Series dp682, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    • Handle: RePEc:huj:dispap:dp682
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    References listed on IDEAS

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    Keywords

    NTU game; Convex game; Bargaining set;
    All these keywords.

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