INTRODUCTION

We examine the connection between, and distinction between, decreasing marginal value (whatever that may mean) and risk aversion (from Pratt, 1964). When a decision maker (DM henceforth) declares indifference between $1,500 for certain and a 50–50 lottery with payoffs $0 and $5,000, the DM may have two concerns: (1) a feeling that going from $0 to $2,500 is “worth far more” than going from $2,500 to $5,000, and (2) being “nervous” about the uncertainty in the gamble. We will call the first concern “strength of preference” and the second concern “intrinsic risk aversion.” How much of the $1,000 difference between the arithmetical average of the gamble payoffs and the certainty equivalent is due to each of these concerns? Apart from a natural curiosity about such things we have other motivations:

1. (a) Many utility-assessment procedures currently rely heavily on answers to questions about gambles (e.g., Keeney and Raiffa, 1976); but decision makers are often uncomfortable with making choices among risky alternatives. Can alternative procedures that do not rely heavily on gambling questions be used justifiably?

2. (b) Many value-assessment procedures rely exclusively on strength-of-preference protocols (e.g., by comparing increments of gain or loss) and never confront subjects with risky choices. But some of these studies are then used to guide risky-choice options. […]