Axiomatic Models of Perceived Risk

Abstract

Abstract This article presents two classes of measures for perceived risk based on decomposing a lottery into its mean and its dispersion about the mean, or standard risk. One of the classes of risk measures presumes that there is no risk when there is no uncertainty involved, and the other allows different degenerate lotteries to be evaluated with different values of “risk.” The former has more prescriptive appeal in risky decision making, but the latter may have more descriptive power for subjective risk judgments. These risk measures can also incorporate the asymmetric effects of losses and gains on perceived risk when an appropriate form of the standard measure of risk is applied. These perceived risk models unify a large body of empirical evidence regarding risk judgments, and provide sufficient flexibility to capture better perceptions of risk than previously developed risk models. Further, they provide clear ways to accommodate financial measures of risk and psychological measures of risk, and they can be incorporated into preference models based on mean‐risk trade‐offs.

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