Tuned Risk Aversion in Rational Preferences without the Monotonicity Axiom

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Abstract

We analyze complete preference orderings in a normative axiomatic setting
in which the monotonicity axiom is deliberately rejected, and propose Tuned
Risk Aversion (TRA) as a natural interpretation of the extra flexibility that
arises. TRA refers to tuning patterns of risk (and ambiguity) aversion to
the composition of a lottery (or act) at hand, assuming an overall `budget'
for accumulated risk aversion over stages of information. This makes the
aversion level applied to a part intrinsically depending on the whole, in a
way that turns out to be in line with frequently observed deviations from the
Sure-Thing Principle. Uniqueness of updates is derived from a non-recursive
form of consistency that also guarantees dynamic choice consistency under
appropriate assumptions. The Allais paradox is used as leading example.
Ambiguity aversion is illustrated by application to the 50:51 Example.
Original languageEnglish
Publication statusUnpublished - 18 Dec 2015

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