- Title
- A satisficing approach to eliciting risk preferences
- Creator
- Berg, Nathan; Prakhya, Srinivas; Ranganathan, Kavitha
- Relation
- Funding BodyARCGrant NumberDP150100242 http://purl.org/au-research/grants/arc/DP150100242
- Relation
- Journal of Business Research Vol. 82, Issue January, p. 127-140
- Publisher Link
- http://dx.doi.org/10.1016/j.jbusres.2017.08.029
- Publisher
- Elsevier
- Resource Type
- journal article
- Date
- 2018
- Description
- A new approach is proposed to eliciting risk preferences by framing choice over risky payoff distributions as a satisficing task. We demonstrate novel links between the information elicited from the satisficing task—which allows subjects to consider accepting a worse worst-case outcome in favor of a better best-case outcome—and portfolio choice using expected utility theory (EUT). The key tradeoff in our satisficing task can also be stated in reverse: to consider accepting less attractive potential upside gains in order to improve worst-case outcomes. Risk preferences are elicited by asking subjects to choose an acceptable worst-case portfolio outcome from a continuum of binary gambles, each with its own support and unique minimum. The worst-case aspiration represents the smallest low-state payoff in the binary gamble that the subject is willing to accept. We show analytically and empirically that choosing a most preferred worst-case aspiration maps into a logically equivalent—but psychologically distinct—process of expected utility maximization (i.e., allocating one's savings over a binary risky asset and risk-free bond using the EUT framework with a unique risk-acceptance parameter under CARA or CRRA risk preferences).
- Subject
- risk preference; elicitation; satisficing; Herbert Simon; portfolio choice; simple rules that make us smart; simplicity
- Identifier
- http://hdl.handle.net/1959.13/1391241
- Identifier
- uon:33189
- Identifier
- ISSN:0148-2963
- Language
- eng
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