Risk and Uncertainty Aversion with Reference to the Theories Of Expected Utility, Rank Dependent Expected Utility, and Choquet Expected Utility.

This paper reports on two experiments that test the descriptive validity of ambiguity models using a natural source of uncertainty (the evolution of stock indices) and both gains and losses. We observed violations of probabilistic sophistication, violations that imply a fourfold pattern of ambiguity attitudes: ambiguity aversion for likely gains and unlikely losses and ambiguity seeking for unlikely gains and likely losses. Our data are most consistent with prospect theory and, to a lesser extent, α-maxmin expected utility and Choquet expected utility. Models with uniform ambiguity attitudes are inconsistent with most of the observed behavioral patterns. (JEL D81, D83, G11, G12, G14)

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Rank-dependent Expected Utility - An Outline

Generalized Expected Utility Theory ◽

10.1007/978-94-011-2182-8_5 ◽

1993 ◽

pp. 55-74

Author(s):

John Quiggin

Keyword(s):

Expected Utility ◽

Rank Dependent Expected Utility

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093049 (E12) Risk aversion with state-dependent preferences in the rank-dependent expected utility theory

Insurance Mathematics and Economics ◽

10.1016/s0167-6687(97)89203-7 ◽

1997 ◽

Vol 20 (3) ◽

pp. 267

Keyword(s):

Risk Aversion ◽

Expected Utility ◽

Utility Theory ◽

Expected Utility Theory ◽

State Dependent ◽

Rank Dependent Expected Utility

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BETTING MARKET: Rank Dependent Expected Utility

The Journal of Gambling Business and Economics ◽

10.5750/jgbe.v1i2.515 ◽

2013 ◽

Vol 1 (2) ◽

pp. 147-163

Author(s):

Loreto Llorente

Keyword(s):

Decision Theory ◽

Expected Utility ◽

Utility Maximization ◽

Betting Market ◽

Expected Utility Maximization ◽

Classical Decision ◽

Rank Dependent Expected Utility ◽

The Way

In Pelota matches, games with two mutually exclusive and exhaustive outcomes, bets on the winner are made through a middleman who receives 16% of the finally paid amount. The classical decision theory of expected utility maximization can not explain this market assuming bettors are identical. Llorente and Aizpurua (2007) explain the existence of bets in the market under Quiggin’s rank dependent expected utility (RDEU) model. They find that bettors have to be optimistic in order to explain the existence of a bet. Analyzing the way odds are fixed in the market Llorente (2006) finds that assuming equal return on bets there are inefficiencies in the market. In this paper we show that, given an assumption that bettors are rank dependent expected utility maximizers, these inefficiencies tend to disappear.

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