Rank-Dependent Utility Theory

Originally called anticipated utility theory, rank-dependent utility theory is a generalized expected utility model. It was first developed by John Quiggin in 1982 as a solution for violations of stochastic dominance (where one outcome is always ranked above another), which expected utility theories were not able to resolve. It involves making decisions under risk and uncertainty. Expected utility theory uses the probabilities as the criteria to make decisions, while rank-dependent theory incorporates the role of weights, which is decided by the decision maker. In the condition that the decision maker only uses the probabilities for his or her weighting, the result of rank-dependent model and expected utility model would be the same. Thus, expected utility model is a special case of rank-dependent model, based on ...