Assessment of Simple Joint Time/Risk Preference Functions
Technical rept. 1 May 1973-30 Jun 1975
STANFORD UNIV CA DEPT OF ENGINEERING ECONOMIC SYSTEMS
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This article outlines a procedure for assessing a decision makers cardinal utility function Ux sub 1,...,x sub i,...,x sub N where x sub i is the payoff in the i th period of an N-period future. The function Ux captures the decision makers time preferences his willingness to trade off payoffs between time periods and his risk preferences his attitude toward risk taking. The procedure outlined uses a straightforward but little known two- step method for assessing multiattribute utility. In the first step the decision maker is asked to reveal time preferences by choosing between sure payoff vectors. In the second step attitude toward uncertainty is measured by encoding risk aversion on an appropriate single-dimensional index. The two steps are combined mathematically to produce the utility function. A new preference parameter is introduced. The parameter, called the coefficient of variation aversion, is a measure of how strongly an individual feels about undesirable variations in payoff vectors. It is shown that the coefficient of variation aversion exists and is strictly positive if the ordinal preference function has an additive representation and preferences satisfy a reasonable set of axioms.
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