Risk Perception, Risk Attitude and Decision : a Rank-Dependent Approach

The classical expected utility model of decision under risk (von NeumannMorgenstern, 1944) has been criticized from an experimental point of view (Allais’ paradox) as well as for its restrictive lack of explanatory power. The RankDependent Expected Utility model (RDU) model (Quiggin, 1982) attempts to answer some of these criticisms. The decision maker is characterized by two functions: a utility function on consequences measuring preferences over sure outcomes and a probability weighting function measuring the subjective weighting of probabilities. As we show and illustrate in this paper, this model allows for more diversi...ed types of behavior: it is consistent with the behavior revealed by the Allais paradox; the decision maker could dislike risk (prefer to any lottery its expectation) without necessarily avoiding any increase in risk; diminishing marginal utility may coexists with "weak" risk seeking attitudes; decision makers with the same utility function may di¤er in their choices between lotteries when they have di¤erent probability weighting functions; furthermore, the same decision maker may have di¤erent, context-dependent, subjective beliefs on events.