Abstract
How should you choose between risky options? This paper proposes reckoning, defined as the expectation for the lower of two draws from a variable’s distribution. In symbols this is E[min(X_1,X_2)]. This is a special case of rank-dependent expected utility and provides a tractable alternative to the expected utility E[U(X)]. We demonstrate its computational tractability with an online calculator.Reckoning can be used as a guide to decision-making under risk. We illustrate with examples in lotteries and insurance. We compare reckoning with expected utility and with generalized utility theories. The theory gives a novel explanation of risk aversion using the analysis of background risks.
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