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Certainty Equivalent Representation of Binary Gambles That Are Decomposed into Risky and Sure Parts

Author

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  • Yutaka Matsushita

    (Kanazawa Institute of Technology, Japan)

Abstract

This paper develops a weighted additive model for certainty equivalents of binary gambles with a segregation form, in the sense that they are decomposition into sure gains and risky gambles. The effect of adding a sure gain to the preference for a risky gamble is considered to be evaluated by weight. First, a certainty equivalent of every gamble is decomposed into the addition of a sure gain and a conditional certainty equivalent. Second, two new conditions are provided to express the conditional certainty equivalent as a multiplicative form by weight.

Suggested Citation

  • Yutaka Matsushita, 2012. "Certainty Equivalent Representation of Binary Gambles That Are Decomposed into Risky and Sure Parts," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 65-75, May.
    • Handle: RePEc:bap:journl:120206
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    References listed on IDEAS

    as
    1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    2. Peter Fishburn, 1980. "A simple model for the utility of gambling," Psychometrika, Springer;The Psychometric Society, vol. 45(4), pages 435-448, December.
    3. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    4. Enrico Diecidue & Ulrich Schmidt & Peter P. Wakker, 2004. "The Utility of Gambling Reconsidered," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 241-259, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Segregation; Certainty equivalent; Utility of gambling; Risk attitude;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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