Normalized Expected Utility-Entropy Measure of Risk

Abstract

Yang and Qiu proposed an expected utility-entropy (EU-E) measure of risk, which reflects an individual’s intuitive attitude toward risk. Luce et al. have derived the numerical representations under behavioral axioms about preference orderings among gambles and their joint receipt, which further demonstrates the reasonability of the EU-E decision model as a normative one. In the paper, combining normalized expected utility and entropy together, we improve the EU-E measure of risk and decision model, and then propose the normalized EU-E measure of risk and decision model. The normalized EU-E measure of risk has some normative properties under certain conditions. Moreover, the normalized EU-E decision model can be a proper descriptive model to some extent. Using this model, two cases of common ratio effect and common consequence effect, which are the examples of certainty effects, can be explained in an intuitive way.

Keywords

• risk
• normalized expected utility
• normalized entropy
• certainty effect
• common ratio effect
• common consequence effect