I don't know the evidence on the point, but you are proposing the expected utility model with risk neutrality. The variance of gamble 1 is p(1-p)X^2, which means that the variance is low for low and high values of p, and high for middle values of p. So if p is low, as p is increased, both the mean and variance rise. From my brief foray into the finance literature (I sat on a Ph.D. committee in finance a few years back), my recollection is that risk neutrality works badly. Bill Sjostrom
+++++++++++++ William Sjostrom Senior Lecturer Department of Economics National University of Ireland, Cork Cork, Ireland +353-21-490-2091 (work) +353-21-427-3920 (fax) +353-21-463-4056 (home) [EMAIL PROTECTED] [EMAIL PROTECTED] www.ucc.ie/~sjostrom/ ----- Original Message ----- From: "Bryan Caplan" <[EMAIL PROTECTED]> To: <[EMAIL PROTECTED]>; <[EMAIL PROTECTED]> Sent: Monday, November 11, 2002 8:35 PM Subject: EU > It's well-known that expected utility theory has a lot of problems. A > number of alternative theories of choice under uncertainty haven't > worked out too well either. > > Has anyone ever proposed a bare-bones theory of choice under > uncertainty, basically saying only that all else equal, you become more > likely to choose an option as it's expected value increases (without > saying how much)? Suppose, for example, that you get to choose between > two gambles: > > Gamble 1: $X with probability p. > > Gamble 2: $Y with probability q. > > Indicate preference with > or <, and probability as P(.). > > My bare bones theory says: > > 1. P(1>2) increases in p. > 2. P(1>2) decreases in q. > 3. P(1>2) increases in X. > 4. P(1>2) decreases in Y. > > and nothing more specific. > > Is this inconsistent with any experimental evidence? > -- > Prof. Bryan Caplan > Department of Economics George Mason University > http://www.bcaplan.com [EMAIL PROTECTED] > > "He wrote a letter, but did not post it because he felt that no one > would have understood what he wanted to say, and besides it was not > necessary that anyone but himself should understand it." > Leo Tolstoy, *The Cossacks* > > >
