Aversion to risk of regret and preference for positively skewed risks (Q2218535): Difference between revisions

Let \(\mathcal{S}=\{1,2,\ldots, S\}\) be a set of possible states of nature with corresponding probabilities \(\{p_1,p_2,\ldots, p_S\}\). A lottery (or an act) is defined by a function \(x:\mathcal{S}\rightarrow\mathbb{R}\) that describe the final payoff \(x(s)\) for each state \(s\in\mathcal{S}\). The choice problem is characterized by a menu \( \mathcal{M}=\{x_\theta:\mathcal{S}\rightarrow\mathbb{R}\,|\, \theta\in\Theta\}\) of lotteries, where the index set of possible choices \(\Theta\) is supposed to be finite. Author of the paper consider choices by assuming that the decision maker is sensitive to regret. This means that the utility \(U=U(x_\theta(s),y(s))\) in any state \(s\) is a function of two variables: the final payoff \(x_\theta(s)\) of the chosen lottery and the maximal consumption \(y(s)=\max_{\theta\in \Theta}x_\theta(s)\). Author of the paper introduce concept of \textit{Aversion to Risk of Regret} and consider the decision-maker menu choices under such choice concept.