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Risk perception, risk attitude and decision : a Rank-Dependent approach



The classical expected utility model of decision under risk (von Neumann-Morgenstern, 1944) has been criticized from an experimental point of view (Allais' paradox) as well as for its restrictive lack of explanatory power. The Rank-Dependent Expected Utility model (RDU) model (Quiggin, 1982) attempts to answer some of these criticisms. The decision maker is characterized by two functions : a utility function on consequences measuring preferences over sure outcomes and a probability weighting function measuring the subjective weighting of probabilities. As we show and illustrate in this paper, this model allows for more diversified types of behavior : it is consistent with the behavior revealed by the Allais paradox ; the decision maker could dislike risk (prefer to any lottery its expectation) without necessarily avoiding any increase in risk ; diminishing marginal utility may coexists with "weak" risk seeking attitudes ; decision makers with the same utility function may differ in their choices between lotteries when they have different probability weighting functions ; furthemore, the same decision maker may have different, context-dependent, subjective beliefs on events.

Suggested Citation

  • Michèle Cohen, 2008. "Risk perception, risk attitude and decision : a Rank-Dependent approach," Documents de travail du Centre d'Economie de la Sorbonne v08084, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:v08084

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    References listed on IDEAS

    1. Cesarini, David & Sandewall, Orjan & Johannesson, Magnus, 2006. "Confidence interval estimation tasks and the economics of overconfidence," Journal of Economic Behavior & Organization, Elsevier, vol. 61(3), pages 453-470, November.
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    More about this item


    Decision under risk; risk perception; risk aversion; Allais paradox; Rank-Dependent Expected Utility model.;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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