OPTIMAL DECISIONS WITH LINEAR RANDOM PAYOFF

This paper provides a unified analysis of decision under uncertainty with payoffs that are linear in the random variable. This class involves additive as well as multiplicative risks and is widely used in the literature. The total effect of an increase in risk on choice is decomposed into an income effect and a substitution effect. Properties of preferences that control the sign of these effects are identified. Copyright © 2006 The Authors; Journal compilation © Blackwell Publishing Ltd and The University of Manchester 2006.