On the Intuition of Rank-Dependent Utility

41 Pages Posted: 29 Nov 2000

See all articles by Enrico Diecidue

Enrico Diecidue

INSEAD – Decision Sciences

Peter P. Wakker

University of Amsterdam - Amsterdam School of Economics (ASE)

Abstract

Among the most popular models for decision under risk and uncertainty are the rank-dependent models, introduced by Quiggin and Schmeidler. Central concepts in these models are rank-dependence and comonotonicity. It has been suggested in the literature that these concepts are technical tools that have no intuitive or empirical content. This paper describes such contents. As a result, rank-dependence and comonotonicity become natural concepts upon which preference conditions, empirical tests, and improvements for utility measurement can be based. Further, a new derivation of the rank-dependent models is obtained. It is not based on observable preference axioms or on empirical data, but naturally follows from the intuitive perspective assumed. We think that the popularity of the rank-dependent theories is mainly due to the natural concepts adopted in these theories.

Keywords: rank-dependence, comonotonicity, Choquet integral, pessimism, uncertainty aversion, prospect theory

JEL Classification: D81, C60

Suggested Citation

Diecidue, Enrico and Wakker, Peter P., On the Intuition of Rank-Dependent Utility. Journal of Risk and Uncertainty (2001) 23, 281-298, CentER Working Paper No. 74, Available at SSRN: https://ssrn.com/abstract=244668 or http://dx.doi.org/10.2139/ssrn.244668

Enrico Diecidue

INSEAD – Decision Sciences ( email )

France

Peter P. Wakker (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands