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|
|Date of revision:|
|Publication status:||Published, Economic Theory, 2005, 25, 649-667|
|Note:||View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00211906|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/|
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Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Chateauneuf, Alain & Cohen, Michele & Meilijson, Isaac, 2004. "Four notions of mean-preserving increase in risk, risk attitudes and applications to the rank-dependent expected utility model," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 547-571, August.
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