State Preference Theory

The state preference theory or state preference theory forms an analytical basis for understanding the economic structure of modern capital market models . It goes back to Kenneth Arrow and Gérard Debreu .

To correctly assess state-dependent prices can be state prices (also Arrow-Debreu prices) are derived. In a future point in time, different environmental states ( English states ) can occur. The financial stocks considered can cause different payments depending on the situation that has occurred.

The state-preference theory examines the question of how goods and monetary units which in different future " environmental conditions (" English nature of states ) are available, are valued today. The discrete characteristics of the random variables that describe the environmental conditions are considered to be states ; it is therefore also called a state variable. “State preference” is intended to express that the actors evaluate goods or payments differently in the individual states: There are “good” and “bad” states. Obviously, a state will be described as “good” if the equipment, wealth or consumption in the state in question is high and consequently the marginal utility of an additional unit of goods or money - and thus today's willingness to pay for it - is low. It can be seen from this that there is a close connection between state preference and the classic assumptions regarding risk aversion .

literature

• Kling, Catherine L .; Phaneuf, Daniel J .; Zhao, Jinhua: From Exxon to BP: Has Some Number Become Better than No Number? The Journal of Economic Perspectives , Volume 26, Number 4, Fall 2012, pp. 3-26 (24).