Modelling Attitude to Risk in Expected Utility Theory and Prospect Theory

Modelling and Analysis of Safety and Risk in Complex Systems: Proceedings of the Fifteenth International Scientific Conference 2019
Oleg Uzhga-Rebrov, Gaļina Kuļešova

Modelling decision maker’s attitude to risk is an important task in decision choice processes. The choice of optimal decision heavily depends on the extent of risk inclination or risk aversion of a particular individual. In various existing approaches to decision choice, risks are modelled differently. This paper presents and analyses two most developed approaches to decision choice under risk, expected utility theory and prospect theory. Historically, expected utility theory was developed first and found wide usage. Prospect theory has been developed in the past decades; nowadays, it is a powerful descriptive theory of decision choice under risk.

Keywords
criteria of decision choice under risk, deterministic equivalents of lotteries, expected utility, probability weighting, rank-dependent utility, utility function

Uzhga-Rebrov, O., Kuļešova, G. Modelling Attitude to Risk in Expected Utility Theory and Prospect Theory. In: Modelling and Analysis of Safety and Risk in Complex Systems: Proceedings of the Fifteenth International Scientific Conference, Russia, Saint-Petersburg, 19-21 June, 2019. Saint-Petersburg: Saint-Petersburg State University of Aerospace Instrumentation, 2019, pp.98-105. ISBN 978-5-8088-1363-2.

Publication language
English (en)