Certainty Preference and the Arrow-Pratt Measure

Posted: 26 Jul 2001

See all articles by Ulrich Schmidt

Ulrich Schmidt

University of Kiel - Institute of Economics

Abstract

In Schmidt (1998) a new axiomatic model of decision making under risk has been developed, which can accommodate the certainty effect and is, apart from this property, equivalent to expected utility in all other choice problems. A central feature of this model, termed expected utility with certainty preference, is to allow for a measurement of the certainty effect analogously to the measurement of risk aversion by the Arrow-Pratt measure. The purpose of the present paper is to provide a complete characterization of certainty preference. Therefore, among other things, all standard concepts in the theory of risk aversion are defined and analyzed in the framework of certainty preference. This investigation reveals that the measurement of the certainty effect has the same theoretical capabilities as the measurement of risk aversion by the Arrow-Pratt measure. Additionally, expected utility with certainty preference is compared with the existing literature on non-expected utility models.

Key words: Certainty effect - risk aversion - Arrow-Pratt measure Non-expected utility theory

JEL Classification: D80

Suggested Citation

Schmidt, Ulrich, Certainty Preference and the Arrow-Pratt Measure. OR Spektrum, Vol. 22, No. 3. Available at SSRN: https://ssrn.com/abstract=238198

Ulrich Schmidt (Contact Author)

University of Kiel - Institute of Economics ( email )

Olshausenstrasse 40
24098 Kiel, 24098
Germany

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