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Measures of Perceived Risk

  • Jianmin Jia

    (Department of Marketing, Faculty of Business Administration, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong)

  • James S. Dyer

    (Department of Management Science and Information Systems, The Graduate School of Business, University of Texas at Austin, Austin, Texas 78712)

  • John C. Butler

    (Department of Accounting and MIS, Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

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    Based on our previous work on the standard measure of risk, this paper presents two classes of measures for perceived risk by decomposing a lottery into its mean and standard risk. One of the classes of our risk measures presumes that there is no risk when there is no uncertainty involved, and the other allows different degenerate lotteries to be evaluated with different values of "risk." The former has more prescriptive appeal in risky decision making, but the latter may have more descriptive power for subjective risk judgments. Our risk measures can also take into account the asymmetric effects of losses and gains on perceived risk based on an appropriate choice of the standard measure of risk. The perceived risk models we propose unify a large body of empirical evidence regarding risk judgments, and provide sufficient flexibility to better capture people's perceptions of risk than previously developed risk models. In particular, our risk measures provide clear ways to accommodate financial measures of risk and psychological measures of risk, and they can be incorporated into preference models in an appealing form based on mean-risk tradeoffs.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.4.519
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 4 (April)
    Pages: 519-532

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:4:p:519-532
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    1. David E. Bell, 1988. "One-Switch Utility Functions and a Measure of Risk," Management Science, INFORMS, vol. 34(12), pages 1416-1424, December.
    2. Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 53(2), pages 271-282.
    3. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    4. Jianmin Jia & James S. Dyer, 1996. "A Standard Measure of Risk and Risk-Value Models," Management Science, INFORMS, vol. 42(12), pages 1691-1705, December.
    5. Peter C. Fishburn, 1984. "Foundations of Risk Measurement. I. Risk As Probable Loss," Management Science, INFORMS, vol. 30(4), pages 396-406, April.
    6. Sarin, Rakesh K. & Weber, Martin, 1993. "Risk-value models," European Journal of Operational Research, Elsevier, vol. 70(2), pages 135-149, October.
    7. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
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