IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Payoff Kinks in Preferences Over Lotteries

  • Machina, Mark J
Registered author(s):

    This paper identifies two distinct types of payoff kinks that can be exhibited by preference functions over monetary lotteries - "locally separable" vs. "locally nonseparable" - and illustrates their relationship to the payoff and probability derivatives of such functions. Expected utility and Fréchet differentiable preference functions are found to be incapable of exhibiting locally nonseparable payoff kinks; rank-dependent preference functions are incapable of avoiding them.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.escholarship.org/uc/item/7vn7d2hs.pdf;origin=repeccitec
    Download Restriction: no

    Paper provided by Department of Economics, UC San Diego in its series University of California at San Diego, Economics Working Paper Series with number qt7vn7d2hs.

    as
    in new window

    Length:
    Date of creation: 11 Sep 2000
    Date of revision:
    Handle: RePEc:cdl:ucsdec:qt7vn7d2hs
    Contact details of provider: Postal: 9500 Gilman Drive, La Jolla, CA 92093-0508
    Phone: (858) 534-3383
    Fax: (858) 534-7040
    Web page: http://www.escholarship.org/repec/ucsdecon/
    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Eric Briys & Harris Schlesinger & J.-Matthias Graf v. d. Schulenburg, 1991. "Reliability of Risk Management: Market Insurance, Self-Insurance and Self-Protection Reconsidered," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(1), pages 45-58, June.
    2. Yaari, Menahem E., 1969. "Some remarks on measures of risk aversion and on their uses," Journal of Economic Theory, Elsevier, vol. 1(3), pages 315-329, October.
    3. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
    4. repec:ltr:wpaper:1992.07 is not listed on IDEAS
    5. Ravi Kanbur, S. M., 1982. "Increases in risk with kinked payoff functions," Journal of Economic Theory, Elsevier, vol. 27(1), pages 219-228, June.
    6. Karni, Edi, 1987. "Generalized Expected Utility Analysis of Risk Aversion with State-Dependent Preference," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(1), pages 229-40, February.
    7. Birnbaum, Michael H. & Chavez, Alfredo, 1997. "Tests of Theories of Decision Making: Violations of Branch Independence and Distribution Independence," Organizational Behavior and Human Decision Processes, Elsevier, vol. 71(2), pages 161-194, August.
    8. Kelsey, D. & Milne, F., 1996. "Induced Preferences, Non Additive Probabilities and Multiple Priors," Discussion Papers 96-15, Department of Economics, University of Birmingham.
    9. Weymark, John A., 1981. "Generalized gini inequality indices," Mathematical Social Sciences, Elsevier, vol. 1(4), pages 409-430, August.
    10. Kreps, David M. & Porteus, Evan L., 1979. "Temporal von neumann-morgenstern and induced preferences," Journal of Economic Theory, Elsevier, vol. 20(1), pages 81-109, February.
    11. Chew, S H & Epstein, Larry G & Segal, U, 1991. "Mixture Symmetry and Quadratic Utility," Econometrica, Econometric Society, vol. 59(1), pages 139-63, January.
    12. Spence, Michael & Zeckhauser, Richard J, 1972. "The Effect of the Timing of Consumption Decisions and the Resolution of Lotteries on the Choice of Lotteries," Econometrica, Econometric Society, vol. 40(2), pages 401-03, March.
    13. Machina, Mark J., 1984. "Temporal risk and the nature of induced preferences," Journal of Economic Theory, Elsevier, vol. 33(2), pages 199-231, August.
    14. Tversky, Amos & Wakker, Peter, 1995. "Risk Attitudes and Decision Weights," Econometrica, Econometric Society, vol. 63(6), pages 1255-80, November.
    15. Peter Bardsley, 1992. "Local Utility Functions," Working Papers 1992.07, School of Economics, La Trobe University.
    16. Hong, Chew Soo & Karni, Edi & Safra, Zvi, 1987. "Risk aversion in the theory of expected utility with rank dependent probabilities," Journal of Economic Theory, Elsevier, vol. 42(2), pages 370-381, August.
    17. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
    18. DEBREU, Gérard, . "Smooth preferences," CORE Discussion Papers RP -132, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    19. Loomes, Graham & Segal, Uzi, 1994. "Observing Different Orders of Risk Aversion," Journal of Risk and Uncertainty, Springer, vol. 9(3), pages 239-56, December.
    20. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    21. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
    22. Wakker, Peter & Erev, Ido & Weber, Elke U, 1994. "Comonotonic Independence: The Critical Test between Classical and Rank-Dependent Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 9(3), pages 195-230, December.
    23. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    24. Boyer, M. & Dionne, G., 1988. "More On Insurance, Protection And Risk," Cahiers de recherche 8806, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    25. Kunreuther, Howard, 1996. "Mitigating Disaster Losses through Insurance," Journal of Risk and Uncertainty, Springer, vol. 12(2-3), pages 171-87, May.
    26. Dionne, G. & Eeckhoudt, L., 1984. "Self-Insurance, Self-Protection and Increased Risk Aversion," Cahiers de recherche 8424, Universite de Montreal, Departement de sciences economiques.
    27. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
    28. Yang-Ming Chang & Issac Ehrlich, 1985. "Insurance, Protection from Risk, and Risk-bearing," Canadian Journal of Economics, Canadian Economics Association, vol. 18(3), pages 574-86, August.
    29. Uzi Segal & Avia Spivak, 1988. "First Order Versus Second Order Risk Aversion," UCLA Economics Working Papers 540, UCLA Department of Economics.
    30. Chew, Soo Hong & Epstein, Larry G. & Zilcha, Itzhak, 1988. "A correspondence theorem between expected utility and smooth utility," Journal of Economic Theory, Elsevier, vol. 46(1), pages 186-193, October.
    31. Camerer, Colin F, 1989. " An Experimental Test of Several Generalized Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 2(1), pages 61-104, April.
    32. Roell, Ailsa A, 1987. "Risk Aversion in Quiggin and Yaari's Rank-Order Model of Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 97(388a), pages 143-59, Supplemen.
    33. Karni, Edi, 1989. "Generalized Expected Utility Analysis of Multivariate Risk Aversion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(2), pages 297-305, May.
    34. Birnbaum, Michael H. & McIntosh, William Ross, 1996. "Violations of Branch Independence in Choices between Gambles," Organizational Behavior and Human Decision Processes, Elsevier, vol. 67(1), pages 91-110, July.
    35. Mossin, Jan, 1969. "A Note on Uncertainty and Preferences in a Temporal Context," American Economic Review, American Economic Association, vol. 59(1), pages 172-74, March.
    36. Wu, George & Gonzalez, Richard, 1998. "Common Consequence Conditions in Decision Making under Risk," Journal of Risk and Uncertainty, Springer, vol. 16(1), pages 115-39, April.
    37. Wakker, Peter, 1996. "The sure-thing principle and the comonotonic sure-thing principle: An axiomatic analysis," Journal of Mathematical Economics, Elsevier, vol. 25(2), pages 213-227.
    38. Dekel, Eddie, 1986. "An axiomatic characterization of preferences under uncertainty: Weakening the independence axiom," Journal of Economic Theory, Elsevier, vol. 40(2), pages 304-318, December.
    39. Marcel Boyer & Georges Dionne, 1983. "Variations in the Probability and Magnitude of Loss: Their Impact on Risk," Canadian Journal of Economics, Canadian Economics Association, vol. 16(3), pages 411-19, August.
    40. Machina, Mark J., 1989. "Comparative statics and non-expected utility preferences," Journal of Economic Theory, Elsevier, vol. 47(2), pages 393-405, April.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cdl:ucsdec:qt7vn7d2hs. 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: (Lisa Schiff)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.