Non-Allais Paradox and Context-Dependent Risk Attitudes

TL;DR

This paper introduces a generalized preference model over lotteries that captures context-dependent risk attitudes, allowing for violations of classical axioms and broad applicability beyond traditional expected utility theory.

Contribution

It provides an axiomatization of a flexible model with multiple utility functions to represent context-dependent risk preferences, extending non-expected utility frameworks.

Findings

Model can generate violations of the independence axiom

Flexible with many utility functions or parsimonious with few

Accommodates preferences inconsistent with standard expected utility

Abstract

We provide and axiomatize a representation for preferences over lotteries that generalizes the expected utility model. Since the representation uses different utility functions to evaluate different lotteries, the preferences can be interpreted as coming from individuals that have context-dependent attitudes toward risks. The model enables generating various violations of the independence axiom that are not compatible with some of the most prominent models of non-expected utility. Depending on the specification chosen, the model can range from being very flexible with many different utility functions to being parsimonious with few or just one utility function.