IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v20y1974i7p1047-1072.html
   My bibliography  Save this article

Simplifying the Choice between Uncertain Prospects Where Preference is Nonlinear

Author

Listed:
  • John S. Hammond, III

    (Harvard Business School)

Abstract

This work makes analytical progress in reducing or avoiding two practical difficulties in using preference or utility theory in the analysis of decisions involving uncertainty: (1) assessing the preference curve, and (2) doing calculations with the resultant curve, which may not have an analytically-convenient functional form. The paper identifies circumstances under which simplifications can be found which overcome these difficulties, while at the same time properly reflecting attitude towards risk in the analysis. It is assumed that a decision-maker must choose between risks w\~ 1 and w\~ 2 . He wishes to make decisions consistent with a preference curve u(\cdot) which exists, but has not necessarily been assessed, so he can choose i to maximize expected preference, Eu(w\~ i ). Most results require that the cumulative probability distribution of w\~ 1 and w\~ 2 cross at most once. The results are widely but not universally applicable. Situations are identified where an easy-to-assess, easy-to-analyze preference curve will serve as a proxy for the decision-maker's own preference curve. These situations permit use of any preferences curve from a class having a specified relationship with the decision-maker's curve. For example, in some instances a negative exponential (constant risk aversion) preference function can be used in place of the decision-maker's curve, and in others an expected value analysis will suffice.

Suggested Citation

  • John S. Hammond, III, 1974. "Simplifying the Choice between Uncertain Prospects Where Preference is Nonlinear," Management Science, INFORMS, vol. 20(7), pages 1047-1072, March.
  • Handle: RePEc:inm:ormnsc:v:20:y:1974:i:7:p:1047-1072
    DOI: 10.1287/mnsc.20.7.1047
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.20.7.1047
    Download Restriction: no

    File URL: https://libkey.io/10.1287/mnsc.20.7.1047?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:20:y:1974:i:7:p:1047-1072. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/inforea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Matthew Walls (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.