Portfolio Risk Aversion and Weighted Utility Theory

1987 ◽  
pp. 162-169
Author(s):  
S. H. Chew ◽  
M. H. Mao
Keyword(s):  
Risk Aversion ◽  
Utility Theory ◽  
Portfolio Risk ◽  
Weighted Utility

Testing the Effect of Risk Attitude on Auditor Judgments Using Multiattribute Utility Theory

1993 ◽  
Vol 8 (1) ◽  
pp. 91-110 ◽  
Author(s):  
Timothy A. Farmer
Keyword(s):  
Risk Aversion ◽  
Internal Control ◽  
Utility Theory ◽  
Risk Preference ◽  
Risk Attitude ◽  
Test Results ◽  
Multiattribute Utility ◽  
Multiattribute Utility Theory ◽  
Auditor Judgments ◽  
The Individual

The scaling constant of multiattribute utility functions derived for each of 15 practicing auditors was used to measure risk attitude for the subjects. The risk preference or risk aversion indicated by this metric allowed categorization of the auditors to test for an effect of risk attitude on audit judgments. The sample showed both risk aversion and risk preference among the auditors. The correlations among auditor evaluations of hypothetical internal control compliance test results were generally high and were different for audit seniors than for audit managers. Risk attitude was not found to explain the differences across rank nor the individual differences in consensus.

Contrasting Rational and Psychological Analyses of Political Choice

1988 ◽  
Vol 82 (3) ◽  
pp. 719-736 ◽  
Author(s):  
George A. Quattrone ◽  
Amos Tversky
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Reference Point ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Risky Choice ◽  
Political Candidates ◽  
Risk Seeking ◽  
Psychological Analysis

We contrast the rational theory of choice in the form of expected utility theory with descriptive psychological analysis in the form of prospect theory, using problems involving the choice between political candidates and public referendum issues. The results showed that the assumptions underlying the classical theory of risky choice are systematically violated in the manner predicted by prospect theory. In particular, our respondents exhibited risk aversion in the domain of gains, risk seeking in the domain of losses, and a greater sensitivity to losses than to gains. This is consistent with the advantage of the incumbent under normal conditions and the potential advantage of the challenger in bad times. The results further show how a shift in the reference point could lead to reversals of preferences in the evaluation of political and economic options, contrary to the assumption of invariance. Finally, we contrast the normative and descriptive analyses of uncertainty in choice and address the rationality of voting.

scholarly journals Psychological parameters have units: A bug fix for stochastic prospect theory and other decision models

2018 ◽  
Author(s):  
Neil Stewart ◽  
Benjamin Scheibehenne ◽  
Thorsten Pachur
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Utility Theory ◽  
Expected Utility Theory ◽  
Decision Models ◽  
Strongly Correlated ◽  
Choice Data ◽  
Physical Sciences ◽  
Parameter Measuring ◽  
Choice Probabilities

To fit models like prospect theory or expected utility theory to choice data, a stochastic model is needed to turn differences in values into choice probabilities. In these models, the parameter measuring risk aversion is strongly correlated with the parameter measuring the sensitivity to differences in value. We use dimensional analysis from the physical sciences to show that this is because the sensitivity parameter has units which depend on the risk aversion parameter. This means that comparing sensitivities across individuals with different level of risk aversion is meaningless and forbidden. We suggest a simple bug fix for prospect theory and other decision models which corrects this problem. The bug fix completely removes the correlation between sensitivity and risk aversion parameters in model estimations and allows the parameters to be interpreted as they were originally intended.

scholarly journals Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show

2008 ◽  
Vol 98 (1) ◽  
pp. 38-71 ◽  
Author(s):  
Thierry Post ◽  
Martijn J van den Assem ◽  
Guido Baltussen ◽  
Richard H Thaler
Keyword(s):  
Decision Making ◽  
Risk Aversion ◽  
Prospect Theory ◽  
Expected Utility ◽  
Utility Theory ◽  
Path Dependence ◽  
Expected Utility Theory ◽  
Decision Making Under Risk ◽  
Game Show ◽  
Dependent Choice

We examine the risky choices of contestants in the popular TV game show “Deal or No Deal” and related classroom experiments. Contrary to the traditional view of expected utility theory, the choices can be explained in large part by previous outcomes experienced during the game. Risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes. Our results point to reference-dependent choice theories such as prospect theory, and suggest that path-dependence is relevant, even when the choice problems are simple and well defined, and when large real monetary amounts are at stake. (JEL D81)

scholarly journals Optimal Dynamic Portfolio Risk with First-Order and Second-Order Predictability

2004 ◽  
Vol 4 (1) ◽  
Author(s):  
Christian Gollier
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Interest Rates ◽  
Stock Returns ◽  
Bayesian Learning ◽  
Absolute Risk ◽  
Second Order ◽  
Relative Risk Aversion ◽  
Portfolio Risk ◽  
First Order

We consider a two-period portfolio problem with predictable assets returns. First-order (second-order) predictability means that an increase in the first period returns yields a first-order (second-order) stochastically dominated shift in the distribution of the second period state prices. Mean reversion in stock returns, Bayesian learning, stochastic volatility and stochastic interest rates (bond portfolios) belong to one of these two types of predictability. We first show that a first-order stochastically dominated shift in the state price density reduces the marginal value of wealth if and only if relative risk aversion is uniformly larger than unity. This implies that first-order predictability generates a positive hedging demand for portfolio risk if this condition is met. A similar result is obtained with second-order predictability under the condition that absolute prudence be uniformly smaller than twice the absolute risk aversion. When relative risk aversion is constant, these two conditions are equivalent. We also examine the effect of exogenous predictability, i.e., when the information about the future opportunity set is conveyed by signals not contained in past asset prices.

Inferring Risk Preferences Using Synthetic Win Bets in Horse Betting “Exotic” Markets

2013 ◽  
Vol 2 (1) ◽  
pp. 1-29
Author(s):  
Philip O'Connor
Keyword(s):  
Relative Risk ◽  
Standard Deviation ◽  
Risk Aversion ◽  
Financial Markets ◽  
Utility Function ◽  
Utility Theory ◽  
Risk Preferences ◽  
Higher Order ◽  
Relative Risk Aversion ◽  
Higher Order Moments

Exotic bets: exactas, trifectas and superfectas are complicated gambles that depend on the ordering of horse in a race that can be studied by converting them into “synthetic” or “virtual” win bets. Using two ways of constructing synthetic win bets, it is shown that the favorite-longshot bias is a poor description of the returns of the trifecta and superfecta synthetic win bet. Rather, consistent with financial markets, the standard deviation of the payout of the synthetic win bet better describes the different returns of synthetic win bets.It is found that the synthetic win market dislikes standard deviation and kurtosis (and other higher-order even moments) and likes skewness (and other higher order odd moments), implying participants conform to standard utility theory in their choice between win and synthetic win bets and are not risk-loving. A co-efficient of relative risk aversion of about 3 is estimated. Including higher-order moments strongly affects the magnitude of utility function estimates.

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