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Andrei Savochkin (Collegio Carlo Alberto)

15 October 2012 @ 12:45

 

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Date:
15 October 2012
Time:
12:45
Event Category:

“Decision-Making Under Subjective Risk”

Abstract:

The primary objective of this paper is to develop a framework in which a decision-maker may have subjective beliefs about the “riskiness” of prospects, even though the risk structure of these prospects is objectively specified. Put differently, we investigate preferences over risky alternatives by postulating that such preferences arise from more basic preferences that act on the subjective transformations of these prospects. This allows us to derive a theory of preferences over lotteries with distorted probabilities and provides information about the structure of such distortions. We find that, in the presence of some basic assumptions, the decision-maker distorts probabilities and has non-expected utility preferences if and only if he is not neutral towards ambiguity. In addition, we are able to formulate a behavioral trait such as “pessimism” in the context of risk (independently of any sort of utility representation) as a particular manifestation of the uncertainty aversion phenomenon.