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Security And Potential Level Preferences With

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  • Schmidt, Ulrich

    (Lehrstuhl Finanzmarkttheorie, University of Hannover)

  • Zimper, Alexander

    (Sonderforschungsbereich 504)

Abstract

The security level models of Gilboa (1988) and of Jaffray (1988) as well as the security and potential level model of Cohen (1992) accomodate succesfully classical Allais paradoxa while they offer an interesting explanation for their occurrence. However, experimental data suggest a systematic violation of these models when lotteries with low probabilities of bad or good outcomes are involved. The present paper develops an axiomatic model that allows for thresholds in the perception of security and potential levels. The derived representation of preferences accommodates the observed violations of the original security and potential level models and provides a natural explanation for their occurence. Additionally, a more fundamental problem of the original models is resolved.

Suggested Citation

  • Schmidt, Ulrich & Zimper, Alexander, 2003. "Security And Potential Level Preferences With," Sonderforschungsbereich 504 Publications 03-29, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:03-29
    Note: The authors want to thank Martin Hellwig, Peter Wakker, Ithzak Gilboa, Craig Fox, Martin Peterson,
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    File URL: http://www.sfb504.uni-mannheim.de/publications/dp03-29.pdf
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    References listed on IDEAS

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    1. Itzhak Gilboa, 1988. "A Combination of Expected Utility and Maxmin Decision Criteria," Post-Print hal-00753244, HAL.
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    Cited by:

    1. Zimper, Alexander, 2004. "On the existence of strategic solutions for games with security- and potential level players," Papers 04-04, Sonderforschungsbreich 504.

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