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Title:Risky curves: From unobservable utility to observable opportunity sets PDF Logo
Authors:Friedman, Daniel
Sunder, Shyam
Issue Date:2011
Series/Report no.:Working Papers, UC Santa Cruz Economics Department 681
Abstract:Most theories of risky choice postulate that a decision maker maximizes the expectation of a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and conclude that no such functions have yet been found that are useful for out-of-sample prediction. Nor do we find practical applications of Bernoulli functions in major risk-based industries such as finance, insurance and gambling. We sketch an alternative approach to modeling risky choice that focuses on potentially observable opportunities rather than on unobservable Bernoulli functions.
Subjects:expected utility
risk aversion
St. Petersburg Paradox
decisions under uncertainty
option theory
JEL:C91
C93
D11
D81
G11
G12
G22
L83
Document Type:Working Paper
Appears in Collections:Working Papers, Economics Department, UC Santa Cruz

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