Payoff Kinks in Preferences Over Lotteries

UCSD Economics Discussion Paper No. 2000-22

49 Pages Posted: 29 Nov 2000

See all articles by Mark J. Machina

Mark J. Machina

University of California at San Diego

Date Written: September 2000

Abstract

This paper identifies two distinct types of payoff kinks that can be exhibited by preference functions over monetary lotteries - "locally separable" vs. "locally nonseparable" - and illustrates their relationship to the payoff and probability derivatives of such functions. Expected utility and Frechet differentiable preference functions are found to be incapable of exhibiting locally nonseparable payoff kinks; rank-dependent preference functions are incapable of avoiding them.

JEL Classification: D8

Suggested Citation

Machina, Mark J., Payoff Kinks in Preferences Over Lotteries (September 2000). UCSD Economics Discussion Paper No. 2000-22. Available at SSRN: https://ssrn.com/abstract=245580 or http://dx.doi.org/10.2139/ssrn.245580

Mark J. Machina (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-2391 (Phone)
858-534-7040 (Fax)

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