Arbeitspapier

Dynamic consistent alpha-maxim expected utility

We establish a class of fully nonlinear conditional expectations. Similarly to the usage of linear expectations when a probabilistic description of uncertainty is present, we observe analogue quantitative and qualitative properties. The type of nonlinearity captures the agents sentiments of optimism and pessimism in an ambiguous environment. We then introduce an expected utility under a nonlinear expectation, and show monotonicity and continuity of utility. Risk aversion is characterized, and the properties of the certainty equivalent are discussed. Finally, we derive an Arrow-Pratt approximation of the static certainty equivalent and investigate the dynamic version via recursive equations.

Language
Englisch

Bibliographic citation
Series: Center for Mathematical Economics Working Papers ; No. 535

Classification
Wirtschaft
Mathematical Methods; Programming Models; Mathematical and Simulation Modeling: General
Criteria for Decision-Making under Risk and Uncertainty
Micro-Based Behavioral Economics: General‡
Subject
nonlinear expectation
Knightian Uncertainty
time consistency
risk aversion
certainty equivalent
optimism and pessimism

Event
Geistige Schöpfung
(who)
Beißner, Patrick
Lin, Qian
Event
Veröffentlichung
(who)
Bielefeld University, Center for Mathematical Economics (IMW)
(where)
Bielefeld
(when)
2015

DOI
doi:10.2139/ssrn.2562354
Handle
URN
urn:nbn:de:0070-pub-27189099
Last update
10.03.2025, 11:42 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Beißner, Patrick
  • Lin, Qian
  • Bielefeld University, Center for Mathematical Economics (IMW)

Time of origin

  • 2015

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