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Risky Curves: From Unobservable Utility to Observable Opportunity Sets

  • Friedman, Dan
  • Sunder, Shyam

Most theories of risky choice postulate that a decision maker maximizes the expectationof a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and concludethat no such functions have yet been found that are useful for out-of-sample prediction. Nor dowe find practical applications of Bernoulli functions in major risk-based industries such asfinance, insurance and gambling. We sketch an alternative approach to modeling risky choicethat focuses on potentially observable opportunities rather than on unobservable Bernoullifunctions.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt36q158jt.

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Date of creation: 06 Jun 2011
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Handle: RePEc:cdl:ucscec:qt36q158jt
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