Relative risk–value models

In this paper we propose a relative risk–value model and derive a relative measure of risk for lotteries with positive outcomes. Under a condition called relative risk independence, a decision could be made by explicitly trading off between the relative measure of risk and a measure of value, which can either be consistent with some expected utility models or represent nonexpected utility preferences. Specifically, this type of risk–value model is associated with power (or linear plus power) and logarithmic (or linear plus logarithmic) functions. We address some prescriptive and descriptive implications of our relative risk–value framework, and show that our generalized relative risk–value model is very flexible for modeling individuals' preferences and can explain many decision paradoxes.