Econometrica: Apr, 1977, Volume 45, Issue 3

Risk Invariance and Ordinally Additive Utility Functions

https://doi.org/0012-9682(197704)45:3<621:RIAOAU>2.0.CO;2-6
p. 621-640

Robert D. Willig

This study introduces ordinally additive, ordinally linear, and ordinally Cobb-Douglas utility functions for the analysis of risky decisions when the uncertainty affects several attributes. Practical algorithms for the determination of utility functions with these forms are provided. Further, the study offers several risk invariance axioms on choice behavior under multidimensional risk. These axioms, for the first time, extend to the multidimensional context the heuristic correspondence between risk aversion and subjective wealth, heretofore familiar in only one dimension. In addition, the consequences of these new risk invariance axioms for utility functional forms in the multi-dimensional context are investigated. The result is a sequence of theorems which show that ordinally linear, ordinally Cobb-Douglas, and ordinally additive von Neumann-Morgenstern utility functions are characterized by the risk invariance axioms.