Risk Perception, Risk Attitude and Decision : a Rank-Dependent Approach

The classical expected utility model of decision under risk (von Neumann-Morgenstern, 1944) has been criticized from an experimental point of view (Allais' paradox) as well as for its restrictive lack of explanatory power. The Rank-Dependent Expected Utility model (RDU) model (Quiggin, 1982) attempts to answer some of these criticisms. The decision maker is characterized by two functions : a utility function on consequences measuring preferences over sure outcomes and a probability weighting function measuring the subjective weighting of probabilities. As we show and illustrate in this paper, this model allows for more diversified types of behavior : it is consistent with the behavior revealed by the Allais paradox ; the decision maker could dislike risk (prefer to any lottery its expectation) without necessarily avoiding any increase in risk ; diminishing marginal utility may coexists with "weak" risk seeking attitudes ; decision makers with the same utility function may differ in their choices between lotteries when they have different probability weighting functions ; furthemore, the same decision maker may have different, context-dependent, subjective beliefs on events.