Measures of Perceived Risk

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Abstract
Based on our previous work on the standard measure of risk, this paper presents two classes of measures for perceived risk by decomposing a lottery into its mean and standard risk. One of the classes of our risk measures presumes that there is no risk when there is no uncertainty involved, and the other allows different degenerate lotteries to be evaluated with different values of “risk.” The former has more prescriptive appeal in risky decision making, but the latter may have more descriptive power for subjective risk judgments. Our risk measures can also take into account the asymmetric effects of losses and gains on perceived risk based on an appropriate choice of the standard measure of risk. The perceived risk models we propose unify a large body of empirical evidence regarding risk judgments, and provide sufficient flexibility to better capture people's perceptions of risk than previously developed risk models. In particular, our risk measures provide clear ways to accommodate financial measures of risk and psychological measures of risk, and they can be incorporated into preference models in an appealing form based on mean-risk tradeoffs.

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