IDEAS home Printed from https://ideas.repec.org/a/psc/journl/v5y2013i1p1-34.html
   My bibliography  Save this article

Risk Attitudes, Buying and Selling Price for a Lottery and Simple Strategies

Author

Listed:
  • Michał Lewandowski

    (Warsaw School of Economics)

Abstract

This paper defines the concept of simple strategy and introduces three kinds of simple strategies: wealth-invariant, scale-invariant and "wealthier-accept more". For three commonly used utility function families: CARA, CRRA and DARA equivalent characterizations are obtained in terms of the corresponding simple strategy, in terms of the buying and selling price properties, and in terms of the utility function properties as expressed by Cauchy functional equations. Moreover, an extension of famous Pratt (1964) theorem is proved which involves buying price for a lottery as an alternative measure of comparative risk aversion. Additionally a number of propositions on both selling and buying price for a lottery and CRRA utility class are proved.

Suggested Citation

  • Michał Lewandowski, 2013. "Risk Attitudes, Buying and Selling Price for a Lottery and Simple Strategies," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 5(1), pages 1-34, March.
    • Handle: RePEc:psc:journl:v:5:y:2013:i:1:p:1-34
    as

    Download full text from publisher

    File URL: http://cejeme.eu/publishedarticles/2013-02-20-635099545389687500-6604.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barberis, Nicholas & Huang, Ming, 2009. "Preferences with frames: A new utility specification that allows for the framing of risks," Journal of Economic Dynamics and Control, Elsevier, vol. 33(8), pages 1555-1576, August.
    2. Robert J. Aumann & Roberto Serrano, 2008. "An Economic Index of Riskiness," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 810-836, October.
    3. Aumann, Robert J & Kurz, Mordecai, 1977. "Power and Taxes," Econometrica, Econometric Society, vol. 45(5), pages 1137-1161, July.
    4. Robert J. Aumann & Roberto Serrano, 2006. "An Economic Index of Riskiness," Working Papers 2006-20, Brown University, Department of Economics.
    5. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Krzysztof Kontek & Michal Lewandowski, 2018. "Range-Dependent Utility," Management Science, INFORMS, vol. 64(6), pages 2812-2832, June.
    2. Michał Lewandowski, 2017. "Prospect Theory Versus Expected Utility Theory: Assumptions, Predictions, Intuition and Modelling of Risk Attitudes," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 9(4), pages 275-321, December.
    3. Emilia Tomczyk, 2013. "End of sample vs. real time data: perspectives for analysis of expectations," Working Papers 68, Department of Applied Econometrics, Warsaw School of Economics.
    4. Krzysztof Kontek & Michal Lewandowski, 2013. "Range-Dependent Utility," Working Papers 69, Department of Applied Econometrics, Warsaw School of Economics.
    5. Niyazi Onur Bakir, 2015. "Monotonicity of the Selling Price of Information with Risk Aversion in Two Action Decision Problems," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 7(2), pages 71-90, June.
    6. Michal Lewandowski, 2014. "Buying and selling price for risky lotteries and expected utility theory with gambling wealth," Journal of Risk and Uncertainty, Springer, vol. 48(3), pages 253-283, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christian Gollier & James Hammitt & Nicolas Treich, 2013. "Risk and choice: A research saga," Journal of Risk and Uncertainty, Springer, vol. 47(2), pages 129-145, October.
    2. Xiaosheng Mu & Luciano Pomatto & Philipp Strack & Omer Tamuz, 2021. "From Blackwell Dominance in Large Samples to Rényi Divergences and Back Again," Econometrica, Econometric Society, vol. 89(1), pages 475-506, January.
    3. Chamorro Elosua, Arritokieta & Usategui Díaz de Otalora, José María, 2013. "A Note on Risk Acceptance, Bankruptcy Avoidance and Riskiness Measures," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    4. Heller, Yuval & Schreiber, Amnon, 2020. "Short-term investments and indices of risk," Theoretical Economics, Econometric Society, vol. 15(3), July.
    5. Gagnon, Marie-Hélène & Power, Gabriel J. & Toupin, Dominique, 2023. "The sum of all fears: Forecasting international returns using option-implied risk measures," Journal of Banking & Finance, Elsevier, vol. 146(C).
    6. 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.
    7. Yao, Haixiang & Huang, Jinbo & Li, Yong & Humphrey, Jacquelyn E., 2021. "A general approach to smooth and convex portfolio optimization using lower partial moments," Journal of Banking & Finance, Elsevier, vol. 129(C).
    8. Irina Georgescu & Jani Kinnunen, 2013. "A risk approach by credibility theory," Fuzzy Information and Engineering, Springer, vol. 5(4), pages 399-416, December.
    9. A. Mantovi, 2013. "Mapping completely proper rationality," Economics Department Working Papers 2013-EP01, Department of Economics, Parma University (Italy).
    10. Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2012. "The Appeal of Information Transactions," Working Papers 2012-13, Brown University, Department of Economics.
    11. Yusuke Kamishiro & Roberto Serrano, 2009. "Equilibrium blocking in large quasilinear economies," Working Papers 2009-12, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
    12. Max Bruche, 2009. "Bankruptcy Codes, Liquidation Timing, and Debt Valuation," Working Papers wp2009_0902, CEMFI.
    13. Maier, Johannes & Rüger, Maximilian, 2010. "Measuring Risk Aversion Model-Independently," Discussion Papers in Economics 11873, University of Munich, Department of Economics.
    14. Bi, Hongwei & Huang, Rachel J. & Tzeng, Larry Y. & Zhu, Wei, 2019. "Higher-order Omega: A performance index with a decision-theoretic foundation," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 43-57.
    15. Turan G. Bali & Nusret Cakici & Fousseni Chabi-Yo, 2011. "A Generalized Measure of Riskiness," Management Science, INFORMS, vol. 57(8), pages 1406-1423, August.
    16. Doron Nisani, 2023. "On the General Deviation Measure and the Gini coefficient," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 599-610, September.
    17. Antonio Cabrales & Olivier Gossner & Roberto Serrano, 2013. "Entropy and the Value of Information for Investors," American Economic Review, American Economic Association, vol. 103(1), pages 360-377, February.
    18. Zhang, Yu & Wang, Yu & Tang, Jiafu & Lim, Andrew, 2020. "Mitigating overtime risk in tactical surgical scheduling," Omega, Elsevier, vol. 93(C).
    19. Tiantian Li & Young Shin Kim & Qi Fan & Fumin Zhu, 2021. "Aumann–Serrano index of risk in portfolio optimization," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 94(2), pages 197-217, October.
    20. Lu, Richard & Horng, Tzyy-Leng & Horng, Min-Sun & Wang, Amy Z.-H., 2023. "A performance evaluation of portfolio insurance under the Black and Scholes framework: An application of the economic index of riskiness," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 269-276.

    More about this item

    Keywords

    wealth-invariance; scale-invariance; CARA; CRRA; DARA; risk aversion; buying and selling price for a lottery;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

    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:psc:journl:v:5:y:2013:i:1:p:1-34. See general information about how to correct material in RePEc.

    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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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: Damian Jelito (email available below). General contact details of provider: http://cejeme.org/ .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.