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Asymmetric loss utility: an analysis of decision under risk

Author

Listed:
  • Alex Strashny

    (University of California, Irvine)

Abstract

This paper develops a utility model for evaluating lotteries. In estimating utility, risk averse people use an asymmetric loss function. Expected utility is seen as a special case that is a good approximation of the general case in some cases. The model resolves several paradoxes and makes easily falsifiable predictions. When used in hypothesis testing, the model allows researchers to directly specify their attitudes toward risk. The model is advantageous for two reasons. First, it is based on established principles of probability; second, it resolves several well- known paradoxes.

Suggested Citation

  • Alex Strashny, 2004. "Asymmetric loss utility: an analysis of decision under risk," Game Theory and Information 0405012, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpga:0405012
    Note: Type of Document - pdf; pages: 35
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    References listed on IDEAS

    as
    1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    choice under uncertainty; non-expected utility theory; risk aversion; Allais paradox; Ellsberg paradox; St. Petersburg paradox; Equity Premium Puzzle; decision theory;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory

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