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 ...

We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is distributional neutrality between the two periods. Otherwise, changes of risk aversion that affect the distribu...

We consider all or nothing investment problem with a finite time horizon when the investment opportunity set is changing stochastically over time, especially under Markovian regime-switching environment, and a decision maker faces ambiguity of parameters governing profit flow dynamics of the investment. We apply α-Maxmin Expected Utility(α-MEU) preferences to reflect the ambiguity seeking attit...

We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is distributional neutrality between the two periods. Otherwise, changes of risk aversion that affect the distribu...

In the study of decision making under risk, preferences are assumed to be continuous. We present a model of discontinuous preferences over certain and uncertain outcomes. Using existing parameter estimates for certain and uncertain utility, five important decision theory phenomena are discussed: the certainty effect, experimentally observed probability weighting, the uncertainty effect, extreme...

The curvature of utility functions varies between people. We suggest that there exists a relationship between the mode in which a person usually makes a decision and the curvature of the individual utility function. In a deliberate decision mode, a decisionmaker tends to have a nearly linear utility function. In an intuitive decision mode, the utility function is more curved. In our experiment ...

We develop a version of Afriat’s Theorem that is applicable to a variety of choice environments, beyond the setting of classical consumer theory. This allows us to devise tests for rationalizability in the context of choice data on lotteries, contingent consumption, and intertemporal consumption. We also establish a version of Richter’s Theorem that characterizes the strict rationalizability of...

Aumann and Brandenburger [Econometrica 63 (1995), 1161 1180.] provide sufficient conditions on the knowledge of the players in a game for their beliefs to constitute a Nash equilibrium. They assume, among other things, mutual knowledge of rationality. By rationality of a player, it is meant that the action chosen by him maximizes his expected utility, given his beliefs. There is, however, no ne...

The paper introduces the concept of adjustment utility, that is, referencedependent utility from expectations. It offers an explanation for observed preferences that cannot be explained with existing models, and yields new predictions for individual decision making. The model gives a simple explanation for, e.g., why people are reluctant to change their plans even when these turn out to be unex...

An individual who responds flexibly to wage changes may benefit from random wages. A necessary condition for a preference for wage risk is that the labour supply curve slopes up. Jointly sufficient conditions for wage risk to be preferred are that the individual is neutral to full income risk and the substitution effect of a wage change is at least twice the size of the total income effect. The...