Title: Risk averse preference models for normalised lotteries based on simulation

Authors: Khwazbeen Saida Fatah, Peng Shi, Jamal R.M. Ameen, Ron Wiltshire

Addresses: Faculty of Advanced Technology, University of Glamorgan, Pontypridd CF37 1DL, UK. ' Faculty of Advanced Technology, University of Glamorgan, Pontypridd CF37 1DL, UK. ' Faculty of Advanced Technology, University of Glamorgan, Pontypridd CF37 1DL, UK. ' Faculty of Advanced Technology, University of Glamorgan, Pontypridd CF37 1DL, UK

Abstract: In this paper, we propose a new risk-preference model for ranking pairs of normalised lotteries, random variables, each represents a risk factor obtained by converting the outcomes of the lottery into its mean multiplied by a risk factor. With the existence of an expected utility model, the preference ordering over a pair of such lotteries is converted into a risk-preference ranking over their risk factors. The proposed model is an efficient approximation model based on cumulative distribution functions using simulation. It can be used for analysing preferences between pairs of uncertain alternatives representing financial investment for risk-averse investors. Furthermore, unlike the other models, it can be applied to a variety of randomly distributed variables with different utility functions.

Keywords: cumulative-function; expected-utility theory; mean-variance theory; normalised lotteries; ranking preferences; simulation; operational research; risk averse modelling; preference models.

DOI: 10.1504/IJOR.2010.033137

International Journal of Operational Research, 2010 Vol.8 No.2, pp.189 - 207

Published online: 09 May 2010 *

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