English, Article, Journal or magazine article edition: A Satisficing Alternative to Prospect Theory David B. Brown; Enrico G. De Giorgi; Melvyn Sim

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Bookmark: http://trove.nla.gov.au/version/209280
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • A Satisficing Alternative to Prospect Theory
Author
  • David B. Brown
  • Enrico G. De Giorgi
  • Melvyn Sim
Physical Description
  • preprint
Notes
  • In this paper, we axiomatize a target-based model of choice that allows decision makers to be both risk averse and risk seeking, depending on the payoff's position relative to a prespecified target. The approach can be viewed as a hybrid model, capturing in spirit two celebrated ideas: first, the satisficing concept of Simon (1955); second, the switch between risk aversion and risk seeking popularized by the prospect theory of Kahneman and Tversky (1979). Our axioms are simple and intuitive; in order to be implemented in practice, our approach requires only the specification of an aspiration level. We show that this approach is dual to a known approach using risk measures, thereby allowing us to connect to existing theory. Though our approach is intended to be normative, we also show that it resolves the classical examples of Allais (1953) and Ellsberg (1961).
  • satisficing; aspiration levels; targets; prospect theory; reflection effect; risk measures; coherent risk measures; convex risk measures; portfolio optimization
  • RePEc:usg:dp2009:2009-09
Language
  • English
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