A Prescriptive Model of Averse-Prone Risk Attitudes

Harvey, C.M. (1986). A Prescriptive Model of Averse-Prone Risk Attitudes. IIASA Working Paper. IIASA, Laxenburg, Austria: WP-86-070

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Abstract

This paper presents a prescriptive model for a decision maker's risk attitude toward financial outcomes that have important non-monetary effects, for example, effects on how the decision maker is judged by himself and by others. The model represents the risk attitude of a decision maker who is risk averse in the absence of such psychological effects, but who is risk prone in their presence for actions leading to net losses or the status quo. The model is examined for its adherence to normative principles. In particular, it is argued that the principle of dominance should be specified without any assumptions on preferences between conjunctions of lotteries; such assumptions are shown to imply the apparently stronger principle of risk neutrality.

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