Rank-dependent expected utility

The rank-dependent expected utility model (originally called anticipated utility) is a generalized expected utility model of choice under uncertainty, designed to explain the behaviour observed in the Allais paradox, as well as for the observation that many people both purchase lottery tickets (implying risk-loving preferences) and insure against losses (implying risk aversion). A natural explanation of these observations is that individuals overweight low-probability events such as winning the lottery, or suffering a disastrous insurable loss.

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