Frame - Dependent Utility Theory

A large literature on non-expected utility models has developed preference functionals which are non-linear in probabilities to explain attitudes toward risk. In this paper, we introduce a frame-dependent utility model which resolves many of the paradoxes that motivated non-expected utility models while retaining expected utility analysis for any given decision. In particular, we embed the von Neumann-Morgenstern model of risk preference in a model which also accounts for the decision maker's risk perception. A correspondence between risk perception and risk preference then provides a unified explanation for the classical anomalies.