Risk aversion in the theory of expected utility with rank dependent probabilities (Q1095773): Difference between revisions

This paper investigates risk aversion within an extended model of expected utility which has been axiomatized by \textit{M. Quiggin} [J. Econ. Behav. Organ. 3 (1982)]. Let J be a real interval. A preference relation \(\gtrsim\) in the set of probability distribution functions F over J is represented by a functional \[ V(F)=\int_{J}v(z)d(g\circ F)(z) \] where v and g are continuous, strictly increasing functions, \(v: J\to {\mathbb{R}}\) and g: [0,1]\(\to [0,1]\) onto. Notions of risk aversion are introduced which are similar to the Arrow-Pratt notions in classical expected utility. Provided the functionals V are Gateaux differentiable, it is shown that a preference relation is more risk averse than another preference relation \(\gtrsim^*\) iff v and g are concave transforms of \(v^*\) and \(g^*\), respectively. Results on the (conditional) demand for a riskless asset and on diversification are derived which partly correspond to the classical ones and partly differ from them.