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Payoff Kinks in Preferences Over Lotteries

  • Machina, Mark J
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    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.

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    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.

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    Date of creation: 11 Sep 2000
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    Handle: RePEc:cdl:ucsdec:qt7vn7d2hs
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