Quantifying the Subjective Value of Certainty |
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| Authors: | Joseph G Eisenhauer |
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| Affiliation: | University of Detroit Mercy |
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| Abstract: | Traditional measures of risk preference require that an agent's utility function be twice differentiable and that the risk be miniscule. We introduce a discrete index that requires no assumptions regarding the functional form of utility or the magnitude of the risk. The index quantifies the value of certainty by contrasting the relief that one experiences from the absence of a loss to the regret that (s)he feels at a foregone opportunity for gain. It exhibits a consistent range across different data types, and signals any economically irrational behavior. Empirical estimates are made with reservation price data and reservation probability data. |
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| Keywords: | Risk aversion expected utility certainty equivalent reservation probability |
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