The possibility to interpret expected and nonexpected utility theories in purely probabilistic terms has been recently investigated. Such interpretation proposes as guideline for the Decision Maker the comparison of random variables through their probability to outperform a stochastic benchmark. We apply this type of analysis to the model of Becker and Sarin, showing that their utility functional may be seen as the probability that an opportune random variable, depending on the one to be evaluated, does not outperform a non-random benchmark. (...) Further, the consequent choice criterion is equivalent to a sort of probability of ruin. Possible interpretations and financial examples are discussed. (shrink)

In searching for an appropriate utility function in the expected utility framework, we formulate four properties that we want the utility function to satisfy. We conduct a search for such a function, and we identify Pareto utility as a function satisfying all four desired properties. Pareto utility is a flexible yet simple and parsimonious two-parameter family. It exhibits decreasing absolute risk aversion and increasing but bounded relative risk aversion. It is applicable irrespective of the probability distribution relevant to the prospect (...) to be evaluated. Pareto utility is therefore particularly suited for catastrophic risk analysis. A new and related class of generalized exponential (gexpo) utility functions is also studied. This class is particularly relevant in situations where absolute risk tolerance is thought to be concave rather than linear. (shrink)

This paper uses a game-theoretic framework to formalize the Hayekian notion of equilibrium as the compatibility of plans. To do so, it imposes more structure on the conventional model of strategic games. For each player, it introduces goals, goal-oriented strategies, and the goals’ probabilities of success, from which players’ payoffs are derived. The differences between the compatibility of plans and Nash equilibrium are identified and discussed. Furthermore, it is shown that the notion of compatibility of plans, in general, differs from (...) the notion of Pareto efficiency. Since the compatibility of plans across all players can rarely be achieved in reality, a measurement is introduced to determine various degrees of plan compatibility. Several possible extensions and applications of the model are discussed. (shrink)

Modeling risk in a prescriptively plausible way represents a major issue in decision theory. The benchmarking procedure, being based on the satisficing principle and providing a probabilistic interpretation of expected utility (EU) theory, is prescriptive. Because it is a target-based language, the benchmarking procedure can be applied naturally to finance. In finance, the centrality of risk is widely recognized, but the risk measures that are commonly used to assess risk are too poor as a decision making tool. In this paper (...) we propose a two-stage decision criterion of choice under risk that provides an application of benchmarking to finance through a risk measure. We will analyze some nonexpected utility theories, in particular lottery dependent utility, as potential frameworks for our criterion. (shrink)