OPTIMAL DECISIONS WITH LINEAR RANDOM PAYOFF*

Carmen F. Menezes · X. Henry Wang

2 citations0/0 files storedManchester School

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Decision-Making and Behavioral Economics Economic and Environmental Valuation Experimental Behavioral Economics Studies

Abstract

This paper provides a unified analysis of decision under uncertainty with payoffs that are linear in the random variable. This class involves additive as well as multiplicative risks and is widely used in the literature. The total effect of an increase in risk on choice is decomposed into an income effect and a substitution effect. Properties of preferences that control the sign of these effects are identified.

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2019American Economic Review 1971On the theory of the competitive firm under price uncertainty 1971Increasing risk II: Its economic consequences 1970The Effect of Uncertainty on Saving Decisions 1991Standard Risk Aversion 1996Risk Vulnerability and the Tempering Effect of Background Risk 1972Consumption decisions under uncertainty 1987Proper Risk Aversion

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