I like the distinction of the various kinds of risk aversions :) Economists seem too often to conflate various types of risk aversion with concave utility.
I feel a bit uneasy with REV as a decision model for risk aversion about outcomes. Mainly, it seems awkward to adjust the probabilities instead of the values, if we care more about some kinds of outcomes. It doesn’t feel like it should be dependent on the probability for these possible outcomes.
Why use that instead of applying some function to the outcome’s value?
There are indeed some problems that arise from adding risk weighting as a function of probabilities. Check out Bottomley and Williamson (2023) for an alternative model that introduces risk as a function of value, as you suggest. We discuss the contrast between REV and WLU a bit more here. I went with REV here in part because it’s better established, and we’re still figuring out how to work out some of the kinks when applying WLU.
I like the distinction of the various kinds of risk aversions :) Economists seem too often to conflate various types of risk aversion with concave utility.
I feel a bit uneasy with REV as a decision model for risk aversion about outcomes. Mainly, it seems awkward to adjust the probabilities instead of the values, if we care more about some kinds of outcomes. It doesn’t feel like it should be dependent on the probability for these possible outcomes.
Why use that instead of applying some function to the outcome’s value?
Hi Edo,
There are indeed some problems that arise from adding risk weighting as a function of probabilities. Check out Bottomley and Williamson (2023) for an alternative model that introduces risk as a function of value, as you suggest. We discuss the contrast between REV and WLU a bit more here. I went with REV here in part because it’s better established, and we’re still figuring out how to work out some of the kinks when applying WLU.