Non-Allais Paradox and Context-Dependent Risk Attitudes

Abstract

We provide and axiomatize a representation for preferences over lotteries that generalizes the expected utility model. Since the representation uses different utility functions to evaluate different lotteries, the preferences can be interpreted as coming from individuals that have context-dependent attitudes toward risks. The model enables generating various violations of the independence axiom that are not compatible with some of the most prominent models of non-expected utility. Depending on the specification chosen, the model can range from being very flexible with many different utility functions to being parsimonious with few or just one utility function.