Risk and distributional inequality.

Abstract

Abstract : A distributional model of risk is described in which it is hypothesized that people's judgments of risk are similar to the kinds of judgments made in welfare economics concerning inequality of income distributions. The role played by the Lorenz curve in analyzing inequality is described and it is shown how Lorenz curves can be used to describe risks. Two hypotheses are presented concerning risk: first, that representing risks with Lorenz curves will be useful in capturing the salient psychological features of risk, and second, that people's judgments of positive risks will be similar functionally to judgments of distributional inequality. Six experiments are presented that support the distributional model of risk for both preference judgments and judgments of riskiness. The implications of these experiments are described and the distributional model is compared with alternative models of risk.

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