Abstract
We consider here the problem of how to measure risk aversion in the case of state-dependent utility. As is now well recognized, to assume that an individual’s utility function is state-dependent is warranted if not required in situations where decisions have uncertain consequences not only for income or wealth but for such things as life and health. Several studies have appeared in the past twenty years which have addressed the reasonableness of this assumption, probed its behavioral implications, and searched for a satisfactory axiomatization. 1 But there has been a noticeable gap in the literature dealing with risk aversion measures for state- dependent utility, analogous to those suggested by Arrow (1971) and Pratt (1964) for the case of state-independent preferences.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Arrow, K. J., Essays in the Theory of Risk Bearing (Chicago, Markham, 1971).
Arrow, K. J., “Optimal Insurance and Generalized Déductibles,” Scandinavian Actuarial Journal 1 (1974), 1–42.
Cook, P. J. and D. A. Graham, “The Demand for Insurance and Protection: The Case of Irreplaceable Commodities,” Quarterly Journal of Economics, 91 (February, 1977), 143–156.
Dréze, J. H., “Axiomatic Theories of Choice, Cardinal Utility and Subjective Probability: A Review,” in Allocation Under Uncertainty: Equilibrim and Optimality, ed. J. H. Dreze (New York — Toronto, John Wiley and Sons, 1974.
Eisner, R. and R. Strotz, “Flight Insurance and the Theory of Choice,” Journal of Political Economy, 69 (August, 1961), 355–368.
Hirshleifer, J., “Investment Decisions Under Uncertainty,” Quarterly Journal of Economics, 79 (November, 1965), 509–536, and 80 (May, 1966), 252-277.
Hirshleifer, J. and J. G. Riley, “The Analysis of Uncertainty and Information — An Expository Survey,” Journal of Economic Literature, 17 (December, 1979), 1375–1421.
Jones-Lee, M. W., “The Expected Conditional Utility Theorem for the Case of Personal Probabilities and State-Conditional Utility Functions: A Proof and Some Notes,” Economic Journal, 89 (December, 1979), 834–849.
Jones-Lee, M. W., The Value of Life; A Economic Analysis (Chicago: Univ. Chicago Press, 1976).
Kami, E., “Risk Aversion for State-Dependent Utility Functions: Measurement and Applications,” International Economic Review, 24 (October, 1983), 637–647.
Kami, E., D. Schmeidler and K. Vind, “On State-Dependent Preferences and Subjective Probabilities,” Econotnetrica, 51 (July, 1983), 1021–1031.
Kihlstrom, R. E. and L. J. Mirman, “Risk Aversion with Many Commodities,” Journal of Economic Theory, 8, (July, 1974), 361–388.
Levy, H. and A. Levy, “Multivariate Decision Making,” Journal of Economic Theory, 32 (February, 1984), 36–51.
Parkin, J. M. and S. Y. Wu, “Choice Involving Unwanted Risky Assets and Optimal Insurance,” American Economic Review 62 (December, 1972), 982–987.
Pratt, J. W., “Risk Aversion in the Small and in the Large,” Econometrica 32 (January-April, 1964), 122–136.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 1986 D. Reidel Publishing Company
About this chapter
Cite this chapter
Nordquist, G.L. (1986). State-Dependent Utility and Risk Aversion. In: Daboni, L., Montesano, A., Lines, M. (eds) Recent Developments in the Foundations of Utility and Risk Theory. Theory and Decision Library, vol 47. Springer, Dordrecht. https://doi.org/10.1007/978-94-009-4616-3_22
Download citation
DOI: https://doi.org/10.1007/978-94-009-4616-3_22
Publisher Name: Springer, Dordrecht
Print ISBN: 978-94-010-8551-9
Online ISBN: 978-94-009-4616-3
eBook Packages: Springer Book Archive