Risk-value Theory

In this paper, we propose a new descriptive theory of decision making under risk, called “risk-value theory,” which leads to decision making by explicitly trading off between risk and value (i.e., a subjective value of mean). Our risk-value theory can be either consistent with expected utility theory or represent preferences consistent with non-expected utility theory. Introducing a risk independence condition and other preference conditions, we propose several explicit forms of risk-value models and discuss their dominance and risk aversion properties. Specifically, we develop three useful classes of decision models: exponential risk-value models, generalized disappointment models, and moments risk-value models. These models provide new resolutions based on the intuitively appealing idea of risk-value tradeoffs for observed risky choice behavior and the decision paradoxes that violate the independence axiom of expected utility theory. In particular, this development unifies two streams of research: one in developing preference models and the other in modeling risk judgments. Because of the new perspective of our risk-value theory, it also provides fresh insights into many practical problems and new tools for resolving them. (