The Pearson system of utility functions
AbstractThis paper describes a parametric family of utility functions for decision analysis. The parameterization is obtained by embedding the HARA class in a four-parameter representation for the risk aversion function. The resulting utility functions have only four shapes: concave, convex, S-shaped, and reverse S-shaped. This makes the family suited for both expected utility and prospect theory. We also describe an alternative technique to estimate the four parameters from elicited utilities, which is simpler and easier to implement than standard fitting by minimization of the mean quadratic error.
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Bibliographic InfoPaper provided by EconWPA in its series Game Theory and Information with number 0311002.
Length: 18 pages
Date of creation: 06 Nov 2003
Date of revision:
Note: Type of Document - pdf; prepared on Mac OsX; to print on A4 paper; pages: 18
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coefficient of risk aversion; elicitation of preferences under risk; expected utility; HARA utility functions; Pearson system of distributions; prospect theory; probability weighting function; target- based decisions.;
Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-09 (All new papers)
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