Article ID: | iaor1988290 |
Country: | United States |
Volume: | 35 |
Issue: | 6 |
Start Page Number: | 597 |
End Page Number: | 613 |
Publication Date: | Dec 1988 |
Journal: | Naval Research Logistics Quarterly |
Authors: | Farquhar Peter H. |
Keywords: | decision theory |
This article develops a methodology for testing constant exchange risk properties and identifying an appropriate form for a decision maker’s utility function. These risk properties characterize six different utility functions which are sums of products of polynomials and exponential functions. Such functional forms are commonly used in decision analysis applications. The practical advantage of this methodology is that these constant exchange risk properties eliminate the usual arbitrariness in the selection of a parametric utility function and often reduce the data requirements for subsequent estimation. The procedure is straightforward to apply. The decision maker need only provide certainty equivalents for two-outcome gambles and determine the more-preferred gamble in paired comparisons. The technical details of the procedure can be handled by interactive computer software.