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The Dual Theory of Choice under Risk

Menahem E. Yaari
Econometrica
Vol. 55, No. 1 (Jan., 1987), pp. 95-115
Published by: The Econometric Society
DOI: 10.2307/1911158
Stable URL: http://www.jstor.org/stable/1911158
Page Count: 21
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The Dual Theory of Choice under Risk
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Abstract

This paper investigates the consequences of the following modification of expected utility theory: Instead of requiring independence with respect to probability mixtures of risky prospects, require independence with respect to direct mixing of payments of risky prospects. A new theory of choice under risk--a so-called dual theory--is obtained. Within this new theory, the following questions are considered: (i) numerical representation of preferences; (ii) properties of the utility function; (iii) the possibility for resolving the "paradoxes" of expected utility theory; (iv) the characterization of risk aversion; (v) comparative statics. The paper ends with a discussion of other non-expected-utility theories proposed recently.

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