Cardinal criteria for ranking uncertain prospects
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The purpose of this paper is to develop criteria for comparing and ranking uncertain
prospects when we have some information on the extent to which agents are risk-averse.
The basis for these comparisons is the value of the certainty equivalent outcome of the
corresponding uncertain prospects. Clearly, the ranking established by the values of the
certainty equivalent outcome is identical to the ranking established by the expected utility of
the outcome. By comparing the former values, however, we can determine not only the
ranking of the uncertain prospects under consideration but we can also determined by how
much one prospect would be more valuable than the other in terms of money - for that
particular agent.
The paper develops expressions for approximating the values of the certainty equivalent
outcomes on the basis of the central moments of their distribution and the value of the
underlying coefficient of variation. These criteria are then applied for comparing alternative
crop rotation and irrigation practices of wheat in Israel.