Conditional Risk Premium Research Articles

Non-expected utility risk premiums: The cases of probability ambiguity and outcome uncertainty

This paper discusses two problems. (a) What happens to the conditional risk premium that a decision maker is willing to pay out of the middle prize in a lottery to avoid uncertainty concerning the middle prize outcome, when the probabilities of other prizes change? (b) What happens to the increase that a decision maker is willing to accept in the probability of an unpleasant outcome in order to avoid ambiguity concerning this probability, when this probability increases? We discuss both problems by using anticipated utility theory, and show that the same conditions on this functional predict behavioral patterns that are consistent both with a natural extension of the concept of diminishing risk aversion and with some experimental findings.