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Iterated risk measures for risk-sensitive Markov decision processes with discounted cost

  • Takayuki Osogami
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    We demonstrate a limitation of discounted expected utility, a standard approach for representing the preference to risk when future cost is discounted. Specifically, we provide an example of the preference of a decision maker that appears to be rational but cannot be represented with any discounted expected utility. A straightforward modification to discounted expected utility leads to inconsistent decision making over time. We will show that an iterated risk measure can represent the preference that cannot be represented by any discounted expected utility and that the decisions based on the iterated risk measure are consistent over time.

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    File URL: http://arxiv.org/pdf/1202.3755
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    Paper provided by arXiv.org in its series Papers with number 1202.3755.

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    Date of creation: Feb 2012
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    Handle: RePEc:arx:papers:1202.3755
    Contact details of provider: Web page: http://arxiv.org/

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    1. Stratton C. Jaquette, 1976. "A Utility Criterion for Markov Decision Processes," Management Science, INFORMS, vol. 23(1), pages 43-49, September.
    2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    3. Ronald A. Howard & James E. Matheson, 1972. "Risk-Sensitive Markov Decision Processes," Management Science, INFORMS, vol. 18(7), pages 356-369, March.
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