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Distorted Probabilities and Choice Under Risk

Distorted Probabilities and Choice Under Risk


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About the Book

During the development of modern probability theory in the 17th cen- tury it was commonly held that the attractiveness of a gamble offering the payoffs:1:17 ---: l: with probabilities Pl, . . ., Pn is given by its expected n value L:: l: iPi. Accordingly, the decision problem of choosing among different such gambles - which will be called prospects or lotteries in the sequel-was thought to be solved by maximizing the corresponding expected values. The famous St. Petersburg paradox posed by Nicholas Bernoulli in 1728, however, conclusively demonstrated the fact that individuals l consider more than just the expected value. The resolution of the St. Petersburg paradox was proposed independently by Gabriel Cramer and Nicholas's cousin Daniel Bernoulli [BERNOULLI 1738/1954]. Their argument was that in a gamble with payoffs: l: i the decisive factors are not the payoffs themselves but their subjective values u(: l: i)' According to this argument gambles are evaluated on the basis of the expression L: U(Xi)pi. This hypothesis -with a somewhat different interpretation of the function u - has been given a solid axiomatic foundation in 1944 by v. Neumann and Morgenstern and is now known as the expected utility hypothesis. The resulting model has served for a long time as the preeminent theory of choice under risk, especially in its economic applications.


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Product Details
  • ISBN-13: 9783540542476
  • Publisher: Springer-Verlag Berlin and Heidelberg GmbH & Co. KG
  • Binding: Paperback
  • Height: 234 mm
  • No of Pages: 100
  • Series Title: Lecture Notes in Economic and Mathematical Systems
  • Weight: 227 gr
  • ISBN-10: 3540542477
  • Publisher Date: 10 Jul 1991
  • Edition: Softcover reprint of the original 1st ed. 1991
  • Language: English
  • Returnable: N
  • Spine Width: 6 mm
  • Width: 156 mm


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