Risk aversion in the theory of expected utility with rank dependent probabilities

Abstract

Expected utility with rank dependent probability theory is a model of decision-making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes. This paper defines, based on Gâteaux differentiability, measures of risk aversion for such preferences which characterize the relation “more risk averse” and applies these measures to the analysis of unconditional and conditional portfolio choice problems.