Consider any investor who fears ruin facing any set of investments that satisfy no-arbitrage. Before investing, he can purchase information about the state of nature in the form of an information structure. Given his prior, information structure α is more informative than information structure β if whenever he rejects α at some price, he also rejects β at that price. We show that this complete ...

Recent literature on optimal investment has stressed the difference between the impact of risk and the impact of ambiguity also called Knightian uncertainty on investors’ decisions. In this paper, we show that a decision maker’s attitude towards ambiguity is similarly crucial for investment decisions. We capture the investor’s individual ambiguity attitude by applying α-MEU preferences to a sta...

We present a new financial decision making model by using the fuzzy generalized probabilistic weighted averaging (FGPWA) operator. The main advantage of this new approach is that it is able to deal with probabilities (objective information) and weighted averages (subjective information) in the same formulation. Moreover, it is also able to deal with an uncertain environment that can be assessed...

This paper examines Chinese students’ risk attitude using buying and selling experiments with lotteries. We found that subjects were more risk averse in the buying experiment than in the selling experiment, suggesting the endowment effect. In the selling experiment, subjects were risk loving when there was a low win probability and risk averse with a high win probability, whereas they were risk...

Does information processing affect individual risk-taking behaviour? This paper provides evidence that professional athletes suffer from a left-digit bias when dealing with signals about differences in performance. Using data from the highly competitive field of World Cup alpine skiing for the period of 1992–2014, we show that athletes misinterpret actual differences in race times by focusing o...

Observing that people often use categorization to simplify choice problems and follow some search order to make a choice, we develop and axiomatize a stochastic choice model in which the decision maker first categorizes alternatives in a menu into disjoint categories, then search over categories sequentially until making a choice. The model subsumes both the Luce model and the random considerat...

A growing literature reports the conclusions that: (a) expected utility theory does not provide a plausible theory of risk aversion for both small-stakes and large-stakes gambles; and (b) this decision theory should be replaced with an alternative theory characterized by loss aversion. This paper explains that the arguments in previous literature fail to support these conclusions. Either concav...

What can be inferred, without assuming the Independence axiom, about an agent’s preferences over many-good lotteries from knowledge that the agent is income risk averse? We show that income risk aversion corresponds to an intuitive substitution property of the many-good lottery preferences that is, itself, equivalent to a standard definition of many-good risk aversion. We apply our approach to ...

As risk aversion approaches infinity, the portfolio of an investor with utility over consumption at time T is shown to converge to the portfolio consisting entirely of a bond maturing at time T : Previous work on bond allocation requires a specific model for equities, the term structure, and the investor’s utility function. In contrast, the only substantive assumption required for the analysis ...

Using a large sample of retail investors as well as experimental data we find that risk and ambiguity aversion are positively correlated. We show the common link is decision style: intuitive thinkers tolerate more risk and ambiguity than effortful reasoners. One interpretation is that intuitive thinking confers an advantage in risky or ambiguous situations. We present supporting lab and field e...