Title

Risky Curves: From Unobservable Utility to Observable Opportunity Sets

Document Type

Discussion Paper

Publication Date

8-1-2011

CFDP Number

1819

CFDP Pages

30

Abstract

Most theories of risky choice postulate that a decision maker maximizes the expectation of a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and conclude that no such functions have yet been found that are useful for out-of-sample prediction. Nor do we find practical applications of Bernoulli functions in major risk-based industries such as finance, insurance and gambling. We sketch an alternative approach to modeling risky choice that focuses on potentially observable opportunities rather than on unobservable Bernoulli functions.

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