The Utility Analysis of Choices Involving Risk

Friedman, Milton; Savage, Leonard J.

doi:10.1086/256692

Cited by 2,522 publications

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“…The mechanisms underlying the entrepreneur's optimal behavior in this case are key to understanding the structure of the optimal security (Section 4). Moreover, the ensuing analysis allows us to verify that the entrepreneur's behavior under status concerns is in line with the risk-taking patterns proposed by Friedman and Savage (1948) and prevalent among entrepreneurs and companies, as discussed in the Introduction.…”

Section: Project Development With Internal Financingsupporting

confidence: 54%

“…As elaborated in the Introduction, we model status concerns in line with the classical insight of Friedman and Savage (1948). The idea is that when one's wealth is sufficiently high but not yet at a level associated with high status, one is willing to take risks to increase the probability of reaching high status.…”

Section: Status Concernsmentioning

confidence: 99%

“…We model status concerns of an entrepreneur following a seminal insight of Friedman and Savage (1948). They point that the two characteristics-status concerns and risk-taking propensity-could actually be closely related to each other, giving rise to a preference-based approach to modelling status concerns.…”

Section: Introductionmentioning

confidence: 99%

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Security Design with Status Concerns

et al. 2015

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This paper provides a status-based explanation for convertible securities. We consider a dynamic setting in which a status-driven entrepreneur with a project idea decides what security to issue to finance the project and how to manage the project over time. We solve the problem analytically and find that the optimal security is considerably similar to a convertible security. Our model can also explain why relatively riskier companies, such as start-ups or small firms, resort to convertible securities more often, as well as why these securities differ in their conversion ratios. The dynamic nature of our model is key to our results whereas asymmetric information and ensuing agency conflicts play no role, which makes our explanation of convertible securities notably different from existing ones.JEL Classifications: G32, C61, G24, D86.

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Section: Project Development With Internal Financingsupporting

confidence: 54%

Section: Status Concernsmentioning

confidence: 99%

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Security Design with Status Concerns

et al. 2015

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“…Economic behavior and brain activation both respond to incentive magnitude differently depending on whether the incentive is a gain or a loss relative to a reference point (De Martino et al, 2006;Friedman and Savage, 1948;Kahneman and Tversky, 1979;Tom et al, 2007). Tom et al (2007) recently found NAcc responses to mixed gambles decreased more steeply with loss magnitude than they increased with gain magnitude.…”

Section: Discussionmentioning

confidence: 99%

Valence and salience contribute to nucleus accumbens activation

Cooper¹,

Knutson²

2008

NeuroImage

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Different accounts of nucleus accumbens (NAcc) function have emphasized its role in representing either valence or salience during incentive anticipation. In an event-related FMRI experiment, we independently manipulated valence and salience by cuing participants to anticipate certain and uncertain monetary gains and losses. NAcc activation correlated with both valence and salience. On trials with certain outcomes, NAcc activation increased for anticipated gains and decreased for anticipated losses. On trials with uncertain outcomes, NAcc activation increased for both anticipated gains and losses but did not differ between them. These findings suggest that NAcc activation separately represents both valence and salience, consistent with its hypothesized role in appetitive motivation.

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“…All of the models considered by GR are actually combinations of the distinctive features of PRAM (epitomised by the parameters  and ) together with different specifications of c(.). Since the assumptions relating to  and  are held constant across the seven variants, the considerable differences in the performance of the various models reflect little more 4 Famously, Friedman and Savage (1948) proposed a function that was concave and then became convex; and although Markowitz (1952) was sceptical about their particular proposal, his alternative also had concave and convex ranges. Hey and Orme (1994) allowed the data great freedom and their estimates -see their Table 4 suggested that although strictly concave functions were predominant, there were a small minority exhibiting strict convexity and a much larger minority consistent with functions that were concave for lower payoffs and convex for higher payoffs.…”

Section: Stochastic Specificationsmentioning

confidence: 99%

Quantitative tests of the Perceived Relative Argument Model: Reply to Guo and Regenwetter (2014).

Loomes

2014

Psychological Review

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Guo and Regenwetter take PRAM 2010, add various auxiliary assumptions of their own about the utility of money, make assumptions about possible stochastic specifications, and test the various combined models against data from an experiment they conducted. However, their modelling assumptions are questionable and their experiment is unsatisfactory: the stimuli omit crucial information; the incentives are weak; and the task load is excessive. These shortcomings undermine the quality of the data and the study provides no new information about the scope and limitations of PRAM or its performance relative to other models of risky choice.Acknowledgements: I thank the editor and two referees for many helpful comments.

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The Utility Analysis of Choices Involving Risk

Cited by 2,522 publications

References 0 publications

Security Design with Status Concerns

Security Design with Status Concerns

Valence and salience contribute to nucleus accumbens activation

Quantitative tests of the Perceived Relative Argument Model: Reply to Guo and Regenwetter (2014).

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