Instrument-dependent randomness and increases in risk (Q1074484)

The focus of this paper is individual decision-making under uncertainty. Of particular interest is how individual choice is affected by increases in risk. We generalize previous work to include problems in which the instrument affects the distribution of the random variable, as well as the objective function. Cases of ''instrument-dependent randomness'' are characterized in terms of the effect of the instrument upon the mean and spread of the distribution. The effects of increasing risk include the standard Rothschild-Stiglitz effect, as well as the mean and spread instrument effects induced by the increase in risk. These latter effects are often counterintuitive, as demonstrated by three examples of our results to specific choice problems.