Abstract
A new approach is proposed to eliciting risk preferences by framing choice over risky payoff distributions as a satisficing task. We demonstrate novel links between the information elicited from the satisficing task—which allows subjects to consider accepting a worse worst-case outcome in favor of a better best-case outcome—and portfolio choice using expected utility theory (EUT). The key tradeoff in our satisficing task can also be stated in reverse: to consider accepting less attractive potential upside gains in order to improve worst-case outcomes. Risk preferences are elicited by asking subjects to choose an acceptable worst-case portfolio outcome from a continuum of binary gambles, each with its own support and unique minimum. The worst-case aspiration represents the smallest low-state payoff in the binary gamble that the subject is willing to accept. We show analytically and empirically that choosing a most preferred worst-case aspiration maps into a logically equivalent—but psychologically distinct—process of expected utility maximization (i.e., allocating one's savings over a binary risky asset and risk-free bond using the EUT framework with a unique risk-acceptance parameter under CARA or CRRA risk preferences).
•New approach to eliciting risk preferences by framing risky choice as a satisficing task is proposed•Acceptable worst-case outcomes are traded off against best-case outcomes•New analytic links between satisficing and expected utility theory (EUT) under the assumptions of CARA and CRRA preferences•Analytic model and empirical evidence both demonstrate links between elicited info and EUT•Majority of subjects prefer the satisficing elicitation tool over a portfolio chosen using their own private method