The Utility Analysis of Choices Involving Risk

Friedman, M., & Savage, L. J. (1948). The Utility Analysis of Choices Involving Risk. Journal of Political Economy, 56(4), 279-304.

Type

Journal article

Intellectual base

Primary research

Year

1948

Volume

56

Issue

4

Pages

279-304

DOI

10.1086/256692

DOI registrant

University of Chicago Press

Link

https://doi.org/10.1086/256692

Cited from

economics_finance

Cited by

3 citations across 3 artifacts.

Each citation links to the sentence it supports in the citing article.

Primes

• Risk Aversion
  • Not always descriptively accurate: real decisions often violate expected utility — probability weighting (Allais paradox) , reference-dependence and piecewise-concave utility (Friedman-Savage

    This sourceRationalizes the joint purchase of insurance and lottery tickets with a utility function that is concave over some wealth ranges and convex over others — the doubly-inflected Friedman–Savage curve.

Domain-specific

• Friedman–Savage utility function
  • The curve is concave at lower wealth, convex across an intermediate range and concave again at higher wealth, so local risk attitudes change as outcomes cross wealth regions.
• Probability Weighting Function
  • A person buys a lottery ticket with negative expected value and also purchases insurance priced above expected loss

    This sourceFriedman and Savage, for the co-occurrence itself - the same person insuring at unfavourable odds and gambling at unfavourable odds - which is the puzzle their paper sets out to explain; their own explanation is a doubly inflected utility function, not decision weighting.

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