We develop a nonparametric procedure, called the lattice method, for testing the consistency of contingent consumption data with a broad class of models of choice under risk and under uncertainty. Our method allows for risk loving and elation seeking behavior and can be used to calculate, via...

Asset demand tests for Expected Utility have almost universally been implemented in contingent claim settings where markets are complete. However when markets are incomplete, these tests cannot be applied since contingent claim prices cannot be uniquely recovered from given asset prices and the...

Two well-known violations of Expected Utility Theory (EUT) are the Allais Paradox and the preference reversal between gamble choices and gamble bids. The Allais Paradox undermines the independence axiom, according to which the preferences for two gambles should be unaffected by an independent...

Building on the isomorphism between the theories of risk aversion and precautionary saving, an objective index of prudent behavior is introduced, which generalizes the riskiness index set forth by Aumann and Serrano (2008). A benchmark framework for the monotone relation between risk aversion...

We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is...

This paper analyzes optimal hedging of a tradable risk (e.g. price risk or exchange rate risk) with forward contracts in the presence of untradable inflation risk. Utility is defined over real wealth. Optimal forward positions are derived relative to a given initial exposure in the tradable...

The literature typically attributes the Allais Paradox to a violation of the Independence Axiom. We present experimental data showing that violations of the Reduction of Compound Lotteries Axiom are significantly more problematic, and our findings are robust to both choice and pricing tasks. We...

This paper studies the relation between concavity, stochastic or state dependent utility functions, and risk aversion. Using the common definition of risk aversion, but modified for state dependent preferences, we show that concavity does not imply risk aversion. Instead, it implies a weaker...

This paper uses the notion of augmented utility to summarize models of utility maximization (MUM). The models covered include non-separable utility maximization and common behavioral models of discounting. Moreover, the paper provides as novel special cases necessary and sufficient conditions...