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Payoff Kinks in Preferences Over Lotteries

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  • Machina, Mark J

Abstract

This paper identifies two distinct types of payoff kinks that can be exhibited by preference functions over monetary lotteries - "locally separable" vs. "locally nonseparable" - and illustrates their relationship to the payoff and probability derivatives of such functions. Expected utility and Fréchet differentiable preference functions are found to be incapable of exhibiting locally nonseparable payoff kinks; rank-dependent preference functions are incapable of avoiding them.

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  • Machina, Mark J, 2000. "Payoff Kinks in Preferences Over Lotteries," University of California at San Diego, Economics Working Paper Series qt7vn7d2hs, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt7vn7d2hs
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    2. Frank Milne & Edwin H. Neave, 2003. "A General Equilibrium Financial Asset Economy With Transaction Costs And Trading Constraints," Working Paper 1082, Economics Department, Queen's University.
    3. Robert G. Chambers & John Quiggin, 2007. "Dual Approaches to the Analysis of Risk Aversion," Economica, London School of Economics and Political Science, vol. 74(294), pages 189-213, May.
    4. Mukerji, Sujoy & Tallon, Jean-Marc, 2003. "Ellsberg's two-color experiment, portfolio inertia and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 299-316, June.
    5. Massimo Marinacci & Doriana Ruffino & Fabio Maccheroni, 2011. "Does Uncertainty Vanish in the Small? The Smooth Ambiguity Case," 2011 Meeting Papers 619, Society for Economic Dynamics.
    6. Safra, Zvi & Segal, Uzi, 2002. "On the Economic Meaning of Machina's Frechet Differentiability Assumption," Journal of Economic Theory, Elsevier, vol. 104(2), pages 450-461, June.
    7. Edi Karni & Zvi Safra, 2008. "Moral sentiments and social choice," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 30(3), pages 427-446, April.
    8. Sujoy Mukerji & Jean-Marc Tallon & CNRS-EUREQua & Universite Paris I, 2002. "Ellsberg`s 2-Color Experiment, Bid-Ask Behavior and Ambiguity," Economics Series Working Papers 114, University of Oxford, Department of Economics.
    9. Karni, Edi & Maccheroni, Fabio & Marinacci, Massimo, 2015. "Ambiguity and Nonexpected Utility," Handbook of Game Theory with Economic Applications,, Elsevier.
    10. Kannai, Yakar & Selden, Larry & Kang, Minwook & Wei, Xiao, 2016. "Risk neutrality regions," Journal of Mathematical Economics, Elsevier, vol. 62(C), pages 75-89.
    11. Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, vol. 30(1), pages 66-89, January.
    12. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
    13. Edi Karni & Zvi Safra, 2003. "Moral Sentiments and Social Choice: Fairness Considerations in University Admissions," Economics Working Paper Archive 492, The Johns Hopkins University,Department of Economics.
    14. Liang Zou, 2006. "An Alternative to Prospect Theory," Annals of Economics and Finance, Society for AEF, vol. 7(1), pages 1-28, May.
    15. Akira Maeda, 2008. "Optimal Lottery Design for Public Financing," Economic Journal, Royal Economic Society, vol. 118(532), pages 1698-1718, October.

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