Re-Modeling Risk Aversion: A Comparison of Bernoullian and Rank Dependent Value Approaches

Most modern theories of risky choice originated in the expected utility hypothesis suggested by Daniel Bernoulli in 1738. The phenomenon that he sought to explain was risk aversion. Bernoulli rested the major burden of his explanation on the idea that wealth has diminishing marginal utility. An alternative explanation for risk aversion can be found in the idea that decision makers pay differential attention to the best and worst outcomes in gambles. The present paper contrasts prospect theory, the currently most popular theoretical descendant of Bernoulli’s theory,with an alternative theory based on the idea of rank dependent value.

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