Certainty preference and the Arrow-Pratt measure (Q1586650)

There is a large body of evidence being based on empirical research that contradicting the descriptive validity of the independence axiom which is the central assumption of expected utility theory. One of them is known as the common ratio effect (Seidl, 1999). A special case of it is the certainty effect. In the author's previous paper [J. Math. Psychol. 42, 32-47 (1998; Zbl 0920.92044)] a new axiomatic model of decision making under risk has been developed, which can accommodate the certainty effect and is equivalent to expected utility in all others choice problems. A central feature of this model was termed as expected utility with certainty preferences. The present paper provides a complete characterization of certainty preferences. Particularly, it is shown that the theoretical capabilities of the certainty preference measure is identical to the known Arrow-Pratt's one of absolute risk aversion. Additionally, expected utility with certainty preferences is compared with existing literature on non-expected utility models.