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Decision Making Based on Risk-Value Tradeoffs

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The Mathematics of Preference, Choice and Order

Part of the book series: Studies in Choice and Welfare ((WELFARE))

This essay provides a review for measures of risk and risk-value models that we have developed for the past ten years. Risk-value models are a new class of decision making models based on the idea of risk-value tradeoffs. Intuitively, individuals may consider their choices over risky alternatives by trading off between risk and return, where return is typically measured as the mean (or expected return) and risk is measured by some indicator of dispersion or possible losses. This notion is prevalent in the literatures in finance, marketing and other areas.

Markowitz (1959, 1987, 1991) proposed variance as a measure of risk, and a mean-variance model for portfolio selection based on minimizing variance subject to a given level of mean return. But arguments have been made that mean-variance models are appropriate only if the investor's utility function is quadratic or the joint distribution of returns is normal. However, these conditions are rarely satisfied in practice.

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Author information

Authors and Affiliations

  1. The McCombs School of Business, The University of Texas at Austin, Austin, TX, 78712-012, USA

    Jianmin Jia

  2. Faculty of Business Administration, The Chinese University of Hong Kong, Shatin, N.T. Hong Kong

    James S. Dyer

Authors
  1. Jianmin Jia
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  2. James S. Dyer
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Correspondence to James S. Dyer .

Editor information

Editors and Affiliations

  1. Department of Politics, New York University, New York, NY, 10012, USA

    Steven J. Brams

  2. Department of Business Administration, University of Delaware, Newark, DE, 19716, USA

    William V. Gehrlein

  3. DIMACS Rutgers University, 96 Frelinghuysen Rd, Piscataway, NJ, 08854, USA

    Fred S. Roberts

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Jia, J., Dyer, J.S. (2009). Decision Making Based on Risk-Value Tradeoffs. In: Brams, S.J., Gehrlein, W.V., Roberts, F.S. (eds) The Mathematics of Preference, Choice and Order. Studies in Choice and Welfare. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-79128-7_4

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