Standard models in Economics and Managerial Sciences consider atoms of organizations as units (individuals, families, firms) who are characterized by their endowments (wealth, skills, knowledge) and by their preferences. When choosing from a menu of lotteries, a decision maker will choose the best lottery according to these preferences. Recently, Rabin discovered that within expected utility theory, a moderate level of risk aversion with respect to small lotteries (e.g., a rejection of an even chance to win $110 or lose $100) results in absurd degree of risk aversion with respect to large lotteries (for example, rejection of an even chance to win $12 million or lose $2,000). A possible interpretation of Rabin's results is that it is yet another argument against expected utility theory.
The aim of the proposed research is to show that similar arguments hold against all known models of decision making under risk (that is, lotteries with known probabilities), and to a certain extent, even against models of decision making under uncertainty (where probabilities are unknown). Such results will present a theoretical challenge to the models that were developed in the last 25 years, where the standard assumption is that each decision maker is possessed with one, universal preference relation over lotteries.
One possible implication of the proposed research is that each economic agent should be characterized by a set of such preferences, at least when making decision under risk and uncertainty. Although this idea is well known in psychology, it is not yet fully acceptable by economists. The proposed research will give a mathematical support for this intuitive idea.
