A Taxonomy of Risk-Facing Behaviour

20 May 2008
Professor Harry M. Markowitz
``The Utility of Wealth,'', Markowitz's ``other'' 1952 paper, explains observed risk-seeking and risk-avoidance behaviour by a utility function which has deviation from customary wealth, rather than wealth itself, as its argument. It also assumes that utility is bounded above and below. This talk presents a class (GUW) of functions which generalise utility-of-wealth (UW) functions. Unlike the latter functions, the class is too broad to have interesting, verifiable implications. Rather, various subclasses have such implications. A recent paper by Gillen and Markowitz presents notations to specify various subclasses, and explores the properties of some of these. This talk extends this classification of risk-facing behaviour to non-utility-maximising behaviour as described by Allais and Ellsberg, and formalised by Mark Machina.