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Aspirational Preferences and Their Representation by Risk Measures

David B Brown, Enrico De Giorgi & Melvyn Sim

abstract We consider choice over a set of monetary acts and study a general class of preferences. These preferences favor diversification, except perhaps on a subset of sufficiently disliked acts, over which concentration is instead preferred. This structure encompasses a number of known models, such as expected utility theory, maxmin utility theory, and convex risk measures. We show that such preferences share a dual representation in terms of a family of measures of risk and a target function. Specifically, the choice function is equivalent to selection of a maximum index level such that the risk of beating the target function at that level is acceptable. This dual representation may help to uncover new models of choice. One that we explore in detail is the special case of a bounded target function. This case corresponds to a type of satisficing and has descriptive relevance. Moreover, the model results in optimization problems that may be efficiently solved in large-scale.
   
type journal paper
   
keywords Representation of choice; risk measures; aspiration levels; decision theory paradoxes.
   
language English
kind of paper journal article
date of appearance 11-2012
journal Management Science
publisher Informs Online (Hanover, MD 21076 USA)
ISSN 0025-1909
ISSN (online) 1526-5501
DOI 10.1287/mnsc.1120.1537
volume of journal 58
number of issue 11
page(s) 2095-2113
review double-blind review
   
profile area SEPS - Quantitative Economic Methods
citation Brown, D. B., De Giorgi, E., & Sim, M. (2012). Aspirational Preferences and Their Representation by Risk Measures. Management Science, 58(11), 2095-2113, DOI:10.1287/mnsc.1120.1537.