Rational risk‐aversion: Good things come to those who weight

Christopher Bottomley · Timothy Luke Williamson

16 citations0/0 files storedPhilosophy and Phenomenological Research

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Decision-Making and Behavioral Economics Philosophical Ethics and Theory Experimental Behavioral Economics Studies

Abstract

Abstract No existing normative decision theory adequately handles risk. Expected Utility Theory is overly restrictive in prohibiting a range of reasonable preferences. And theories designed to accommodate such preferences (for example, Buchak's (2013) Risk‐Weighted Expected Utility Theory) violate the Betweenness axiom, which requires that you are indifferent to randomizing over two options between which you are already indifferent. Betweenness has been overlooked by philosophers, and we argue that it is a compelling normative constraint. Furthermore, neither Expected nor Risk‐Weighted Expected Utility Theory allow for stakes‐sensitive risk‐attitudes—they require that risk matters in the same way whether you are gambling for loose change or millions of dollars. We provide a novel normative interpretation of Weighted‐Linear Utility Theory that solves all of these problems.

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References

1945The Theory of Games and Economic Behavior 1953Le Comportement de l'Homme Rationnel devant le Risque: Critique des Postulats et Axiomes de l'Ecole Americaine 1982A theory of anticipated utility 1991A Theory of Disappointment Aversion 1999The Foundations of Causal Decision Theory 1994Violations of the betweenness axiom and nonlinearity in probability 1983A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox 1989An experimental test of several generalized utility theories

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