COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1819 Risky Curves: From Unobservable Utility to Observable Opportunity Sets Daniel Friedman and Shyam Sunder August 2011 Most theories of risky choice postulate that a decision maker maximizes
the expectation of a Bernoulli (or utility or similar) function. We tour 60 years of
empirical search and conclude that no such functions have yet been found that are useful
for out-of-sample prediction. Nor do we find practical applications of Bernoulli functions
in major risk-based industries such as finance, insurance and gambling. We sketch an
alternative approach to modeling risky choice that focuses on potentially observable
opportunities rather than on unobservable Bernoulli functions. |
