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Risky Curves: From Unobservable Utility to Observable Opportunity Sets

  • Daniel Friedman

    (Dept. Economics, UC Santa Cruz; CESifo)

  • Shyam Sunder

    ()

    (Yale School of Management)

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

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File URL: http://cowles.econ.yale.edu/P/cd/d18a/d1819.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1819.

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Length: 30 pages
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:cwl:cwldpp:1819
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Web page: http://cowles.econ.yale.edu/

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