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Aspirational Preferences and Their Representation by Risk Measures

34 Pages Posted: 22 May 2009 Last revised: 23 Feb 2012

David B. Brown

Duke University - Decision Sciences

Enrico G. De Giorgi

University of St. Gallen - SEPS: Economics and Political Sciences

Melvyn Sim

National University of Singapore (NUS) - NUS Business School

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Date Written: February 14, 2012

Abstract

The appendix can be found at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2005194

We consider choice over uncertain, monetary payoffs and study a general class of preferences. These preferences favor diversification, except perhaps on a subset of sufficiently disliked acts, over which concentration is instead preferred. This structure encompasses a number of known models (e.g., expected utility and several variants under a concave utility function). We show that such preferences share a representation in terms of a family of measures of risk and targets. Specifically, the choice function is equivalent to selection of a maximum index level such that the risk of beating the target at that level is acceptable. This representation may help to uncover new models of choice. One that we explore in detail is the special case when the targets are bounded. This case corresponds to a type of satisficing and has descriptive relevance. Moreover, the model is amenable to large-scale optimization.

Keywords: Representation of choice, risk measures, aspiration levels, decision theory paradoxes

JEL Classification: D81

Suggested Citation

Brown, David B. and De Giorgi, Enrico G. and Sim, Melvyn, Aspirational Preferences and Their Representation by Risk Measures (February 14, 2012). Swiss Finance Institute Research Paper No. 09-19; U. of St. Gallen Law & Economics Working Paper No. 2009-07. Available at SSRN: https://ssrn.com/abstract=1406399 or http://dx.doi.org/10.2139/ssrn.1406399

David B. Brown

Duke University - Decision Sciences ( email )

Durham, NC 27708-0120
United States

Enrico G. De Giorgi

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Institute of Mathematics and Statistics
Bodanstrasse 6
CH-9000 St. Gallen
Switzerland
+41712242430 (Phone)

Melvyn Sim (Contact Author)

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

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