More pessimism than greediness: a characterization of monotone risk aversion in the Rank-Dependent Expected Utility model
This paper studies monotone risk aversion, the aversion to monotone, meanpreserving increase in risk (Quiggin ), in the Rank Dependent Expected Utility (RDEU) model. This model replaces expected utility by another functional, characterized by twofunctions, a utility function u in conjunction with a probability-perception function f.Monotone mean-preserving increases in risk are closely related to the notion of comparative dispersion introduced by Bickel & Lehmann [3, 4] in Non-parametric Statistics. We present a characterization of the pairs (u; f) of monotone risk averse decision makers, based on an index of greediness Gu of the utility function u and an index of pessimism Pf of the probability perception function f: the decision maker is monotone risk averse if and onlyif Pf exceeds Gu. A novel element is that concavity of u is not necessary. In fact, u must be concave only if Pf = 1.
|Date of creation:||2005|
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