SFB 303 Discussion Paper No. B - 445
Author: O'Neill, Barry
Title: Risk Aversion in International Relations Theory
Abstract: When international relations theorists use the concept of risk aversion, they usually cite the economics conception involving concave utility functions. However, concavity is meaningful only when the goal is measurable on an interval scale. International decisions are usually not of this type, so that many statements appearing in the literature are formally meaningless. Applications of prospect theory face this difficulty especially, as risk aversion and acceptance are at their center. This paper gives two definitions of risk attitude that do not require an interval scale. The second and more distinctive one uses the property of submodularity in place of concavity. R. D. Luce has devised a theory of choice with features of prospect theory but not requiring on an interval scale, and the second definition in combination with this theory yields the traditional claim that decision makers are risk-averse for gains and risk-seeking for losses.
Keywords: risk aversion, prospect theory, international relations, joint receipts, measurement theory.
Creation-Date: December 1998
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