Lecture Notes in Economics and Mathematical Systems

Distorted Probabilities and Choice under Risk

Authors: Puppe, Clemens

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About this 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.

Table of contents (5 chapters)

Buy this book

eBook 51,16 €
price for Spain (gross)
  • ISBN 978-3-642-58203-5
  • Digitally watermarked, DRM-free
  • Included format: PDF
  • ebooks can be used on all reading devices
  • Immediate eBook download after purchase
Softcover 62,39 €
price for Spain (gross)
  • ISBN 978-3-540-54247-6
  • Free shipping for individuals worldwide
  • Usually dispatched within 3 to 5 business days.
  • The final prices may differ from the prices shown due to specifics of VAT rules
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Bibliographic Information

Bibliographic Information
Book Title
Distorted Probabilities and Choice under Risk
Authors
Series Title
Lecture Notes in Economics and Mathematical Systems
Series Volume
363
Copyright
1991
Publisher
Springer-Verlag Berlin Heidelberg
Copyright Holder
Springer-Verlag Berlin Heidelberg
eBook ISBN
978-3-642-58203-5
DOI
10.1007/978-3-642-58203-5
Softcover ISBN
978-3-540-54247-6
Series ISSN
0075-8442
Edition Number
1
Number of Pages
VIII, 100
Topics