TOWARDS A MORE PRECISE DECISION FRAMEWORK

The terms 'negative utility of gambling' and 'risk aversion' conflate three things: (i) Disutility from the mere act of caking a chance: i.e . negative effects that would not exist if there were no risk or uncer tainty, effects which include serious business considerations such as the availability of loans - exemplified in von Neumann and Morgenstern 's famous 1947 Appendix; (ii) Diminishing marginal utility of money: - exemplified in Bernoulli and Cramer's expected utility procedure; and (iii) A preference for safety: - exemplified in the rank dependent ut ility models of Allais, Lopes, Quiggin and Yaari. Factor (iii) has not been previously distinguished from (i). Factor (i) is regularly eithe r confused with (ii) or ignored as elusive and unimportant. The paper shows that (i) should not be ignored since it is crucial in many serio us business decisions, and need not remain elusive. To separate (i) fr om (ii) and (iii), and consistently incorporate (i), (ii) and (iii) in decision models, the paper identifies progressive stages in people's knowledge of the future and decomposes people's overall valuation of a n option into three steps: 1 utilities distinctive to each of its poss ible outcomes; 2 utility common to all its possible outcomes; 3 aggreg ation rules for forming the overall valuation out of 1 and 2. The sepa ration procedure is illustrated and the ambiguity of current decision models with respect to (i), (ii) and (iii) delineated.