My main argument in favour of risk profiles is to think in terms of the frequency in which events go wrong. It is true that me not getting Covid yesterday should not impact my decisions today, however making choices that yield a probability of a bad event of p over the next month means I’ll have that bad event happen once every 1/p months, on average. Due to loss aversion I might want to cap that frequency, even at the cost of reduced expected utility, hence I’ll give myself a risk profile.
This goes into the psychological effects of loss, which tend to overweight positive outcomes.
Any thoughts?
My main argument in favour of risk profiles is to think in terms of the frequency in which events go wrong. It is true that me not getting Covid yesterday should not impact my decisions today, however making choices that yield a probability of a bad event of p over the next month means I’ll have that bad event happen once every 1/p months, on average. Due to loss aversion I might want to cap that frequency, even at the cost of reduced expected utility, hence I’ll give myself a risk profile. This goes into the psychological effects of loss, which tend to overweight positive outcomes. Any thoughts?