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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Ambiguity aversion
Risk aversion
Axiom
Monotonicity
Dynamic choice
Lottery
Uniqueness
Guarantee
Deviation
Axiomatics
Allais paradox

Cite this

@techreport{9c29dcfe9cd943578fd46009a1acceed,
title = "Tuned Risk Aversion in Rational Preferences without the Monotonicity Axiom",
abstract = "We analyze complete preference orderings in a normative axiomatic settingin which the monotonicity axiom is deliberately rejected, and propose TunedRisk Aversion (TRA) as a natural interpretation of the extra flexibility thatarises. TRA refers to tuning patterns of risk (and ambiguity) aversion tothe composition of a lottery (or act) at hand, assuming an overall `budget'for accumulated risk aversion over stages of information. This makes theaversion level applied to a part intrinsically depending on the whole, in away that turns out to be in line with frequently observed deviations from theSure-Thing Principle. Uniqueness of updates is derived from a non-recursiveform of consistency that also guarantees dynamic choice consistency underappropriate assumptions. The Allais paradox is used as leading example.Ambiguity aversion is illustrated by application to the 50:51 Example.",
author = "Berend Roorda and Joosten, {Reinoud A.M.G.}",
note = "This replaces an earlier version, entitled 'Dynamically Consistent Non-Expected Utility Preferences with Tuned Risk Aversion', June 2015.",
year = "2015",
month = "12",
day = "18",
language = "English",
type = "WorkingPaper",

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AU - Joosten, Reinoud A.M.G.

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PY - 2015/12/18

Y1 - 2015/12/18

N2 - We analyze complete preference orderings in a normative axiomatic settingin which the monotonicity axiom is deliberately rejected, and propose TunedRisk Aversion (TRA) as a natural interpretation of the extra flexibility thatarises. TRA refers to tuning patterns of risk (and ambiguity) aversion tothe composition of a lottery (or act) at hand, assuming an overall `budget'for accumulated risk aversion over stages of information. This makes theaversion level applied to a part intrinsically depending on the whole, in away that turns out to be in line with frequently observed deviations from theSure-Thing Principle. Uniqueness of updates is derived from a non-recursiveform of consistency that also guarantees dynamic choice consistency underappropriate assumptions. The Allais paradox is used as leading example.Ambiguity aversion is illustrated by application to the 50:51 Example.

AB - We analyze complete preference orderings in a normative axiomatic settingin which the monotonicity axiom is deliberately rejected, and propose TunedRisk Aversion (TRA) as a natural interpretation of the extra flexibility thatarises. TRA refers to tuning patterns of risk (and ambiguity) aversion tothe composition of a lottery (or act) at hand, assuming an overall `budget'for accumulated risk aversion over stages of information. This makes theaversion level applied to a part intrinsically depending on the whole, in away that turns out to be in line with frequently observed deviations from theSure-Thing Principle. Uniqueness of updates is derived from a non-recursiveform of consistency that also guarantees dynamic choice consistency underappropriate assumptions. The Allais paradox is used as leading example.Ambiguity aversion is illustrated by application to the 50:51 Example.

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