Relative risk-value models

In this paper we propose a relative risk-value model and derive a relative measure of risk for lotteries with positive outcomes. Under a condition called relative risk independence, a decision could be made by explicitly trading off between the relative measure of risk and a measure of value, which can either be consistent with some expected utility models or represent nonexpected utility preferences. Specifically, this type of risk-value model is associated with power (or linear plus power) and logarithmic (or linear plus logarithmic) functions. We address some prescriptive and descriptive implications of our relative risk-value framework, and show that our generalized relative risk-value model is very flexible for modeling individuals' preferences and can explain many decision paradoxes. (C) 1997 Elsevier Science B.V.