Decision Sciences Journal
Volume 29, Number 2
Spring 1998

Will a Risk-averse Decision Maker Ever Really Prefer an Unfair Gamble?

Ira Horowitz
Department of Decision and Information Sciences, College of Business Administration, University of Florida, Gainesville, FL 32611, email: rohari@dale.cba.ufl.edu

Abstract: Prakash, Chang, Hamid, and Smyser (1996) purport to show that with sufficient preference for positive skewness, risk-averse managers might elect to engage in unfair gambles. Their “proof” of the impossible assumes the existence of a differentiable risk-preference function that satisfies certain assumptions about the first three derivatives. The fundamental flaw in their argument is that no differentiable function exists for which risk aversion and the participation in an unfair gamble are compatible.

Subject Areas: Decision Analysis, Risk and Uncertainty, and Utility Theory.