Security and Potential Level Preferences with Thresholds

The security level models of Gilboa (1988) and of Jaffray (1988) as well as the security and potential level model of Cohen (1992) and Essid (1997) successfully accommodate classical Allais paradoxes while they offer an interesting explanation for their occurrence. However, experimental data suggest a systematic violation of these models when lotteries with low probabilities of bad or good outcomes are involved. In our opinion, one promising candidate for the explanation of these violations is the assumption of thresholds in the perception of security and poten- tial levels. The present paper develops an axiomatic model that allows for such thresholds, so that the derived representation of preferences can accommodate the observed violations of the original security and potential level models.

Working Paper 047
1 March 2007

2007, Journal of Mathematical Psychology, 51, 279-289
19 September 2012
Publication Type: Working Paper
JEL Code: D81

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