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OPTIMAL DECISIONS WITH LINEAR RANDOM PAYOFF *
Author(s) -
MENEZES CARMEN F.,
WANG X. HENRY
Publication year - 2006
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2006.00491.x
Subject(s) - multiplicative function , stochastic game , economics , substitution (logic) , econometrics , sign (mathematics) , mathematical economics , class (philosophy) , variable (mathematics) , mathematics , random variable , microeconomics , computer science , statistics , mathematical analysis , artificial intelligence , programming language
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.