Abstract
In order to measure the certainty effect, the present paper tries to develop an axiomatic model of decision under risk which can accommodate the certainty effect and is, apart from this property, equivalent to expected utility. This leads to a new concept denoted by certainty preference which implies that a higher utility index is assigned to a consequence in the case of certainty than to the same consequence in the presence of risk. Now, a notion of comparative certainty preference can be obtained which will be characterized in terms of properties of the derived utility representation and allows for a generalization of the Arrow–Pratt measure of absolute risk aversion.
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