Dynamically Consistent Non-Expected Utility Preferences with Tuned Risk Aversion ∗

Abstract

We propose the notion of Tuned Risk Aversion as a normative interpretation of non-expected utility preferences. It refers to tuning patterns of risk (and ambiguity) aversion to the composition of a lottery (or act) at hand, assuming an overall ‘budget ’ for accumulated risk aversion over its stages. This makes the aversion level applied to a part intrinsically depending on the whole, in a way that turns out to be in line with frequently observed deviations from the Sure-Thing Principle. Uniqueness of updates is derived from a non-recursive form of consistency, in a general axiomatic setting, that also guarantees dy-namic choice consistency under appropriate assumptions. The Allais paradox is used as leading example. Ambiguity aversion is illustrated by application to the 50:51 Example. ∗We are grateful to Peter Wakker for valuable comments on a preliminary paper that has been

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