Indifference Curves and Uncertainty

Abstract

A decision-maker who has to choose between risky prospects, can always select the prospect which offers the greatest expected gain. In practice, however, it seems as if most decision-makers find it necessary to make some corrections for risk. This may lead to the formulation of a decision rule, which consists of maximizing some function of expected gain and the standard deviation of the gain. It is well known that this role contains contradictions. The author discusses the nature of these contradictions, and gives a number of simple examples.