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Risk perception, risk attitude and decision: a Rank-Dependent approach

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Abstract

The classical expected utility model of decision under risk (von Neumann-Morgenstern, 1944) has been criticized from an experimental point of view (Allais' paradox) as well as for its restrictive lack of explanatory power. The Rank-Dependent Expected Utility model (RDU) model (Quiggin, 1982) attempts to answer some of these criticisms. The decision maker is characterized by two functions: a utility function on consequences measuring preferences over sure outcomes and a probability weighting function measuring the subjective weighting of probabilities. As we show and illustrate in this paper, this model allows for more diversified types of behavior: it is consistent with the behavior revealed by the Allais paradox; the decision maker could dislike risk (prefer to any lottery its expectation) without necessarily avoiding any increase in risk; diminishing marginal utility may coexists with "weak" risk seeking attitudes; decision makers with the same utility function may differ in their choices between lotteries when they have different probability weighting functions; furthemore, the same decision maker may have different, context-dependent, subjective beliefs on events

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  • Michèle Cohen, 2008. "Risk perception, risk attitude and decision: a Rank-Dependent approach," Documents de travail du Centre d'Economie de la Sorbonne v08084, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:v08084
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    2. Moez Abouda & Elyess Farhoud, 2010. "Risk aversion and Relationships in model-free," Post-Print halshs-00492170, HAL.
    3. Jianhua Wang & Hanyu Diao & Lulu Tou, 2019. "Research on the Influence Mechanism of Rational Consumers’ Food Safety Supervision Satisfaction," IJERPH, MDPI, vol. 16(5), pages 1-16, March.
    4. Marc-Arthur Diaye & André Lapidus & Christian Schmidt, 2021. "From Decision in Risk to Decision in Time - and Return: A Restatement of Probability Discounting," Working Papers hal-03256606, HAL.
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    6. Moez Abouda & Elyess Farhoud, 2010. "Anti-comonotone random variables and anti-monotone risk aversion," Post-Print halshs-00497444, HAL.

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    More about this item

    Keywords

    Decision under risk; risk perception; risk aversion; Allais paradox; Rank-Dependent Expected Utility model;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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