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Optimal Decisions With Linear Random Payoff

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  • CARMEN F. MENEZES
  • X. HENRY WANG

Abstract

This paper provides a unified analysis of decision under uncertainty with payoffs that are linear in the random variable. This class involves additive as well as multiplicative risks and is widely used in the literature. The total effect of an increase in risk on choice is decomposed into an income effect and a substitution effect. Properties of preferences that control the sign of these effects are identified.

Suggested Citation

  • Carmen F. Menezes & X. Henry Wang, 2006. "Optimal Decisions With Linear Random Payoff," Manchester School, University of Manchester, vol. 74(3), pages 251-265, June.
    • Handle: RePEc:bla:manchs:v:74:y:2006:i:3:p:251-265
    DOI: 10.1111/j.1467-9957.2006.00491.x
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    Cited by:

    1. Thomas Eichner, 2010. "Slutzky equations and substitution effects of risks in terms of mean-variance preferences," Theory and Decision, Springer, vol. 69(1), pages 17-26, July.
    2. Eichner, Thomas, 2011. "Portfolio selection and duality under mean variance preferences," Insurance: Mathematics and Economics, Elsevier, vol. 48(1), pages 146-152, January.

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