Abstract
The expected-utility framework of von Neumann and Morgenstern (1944) and the theory of risk aversion, as developed by Pratt (1964) and Arrow (1965), remain cornerstones in the economics of choice under uncertainty. Although much recent work has focused on non-expected utility theory, the general preference functionals found in these models typically resemble those generated by expected-utility preferences locally. Moreover, the expected-utility model itself has been extended to account for more complex settings, and the Arrow-Pratt rankings have been shown to be robust in many of these extensions. For example, Kihlstrom, Romer and Williams (1981) and Nachman (1982) show that the Arrow-Pratt rankings extend to models with multiple sources of risk.2 Pratt and Zeckhauser (1987) complement this work by imposing some additional structure on preferences in the presence of multiple risks.
The research was undertaken while Schlesinger was a Visiting Professor at the Catholic Faculty of Mons and CORE, Catholic University of Louvain. Financial support for the former visit from the Intercollegiate Center for Management Science (CIM) in Brussels is gratefully acknowledged.
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Eeckhoudt, L., Schlesinger, H. (1994). A Precautionary Tale of Risk Aversion and Prudence. In: Munier, B., Machina, M.J. (eds) Models and Experiments in Risk and Rationality. Theory and Decision Library, vol 29. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-2298-8_5
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DOI: https://doi.org/10.1007/978-94-017-2298-8_5
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