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OPTIMALITY OF INDEPENDENT DECISION‐MAKING FOR TWO INDEPENDENT RISK SITUATIONS *
Author(s) -
NETER J.,
WILLIAMS C. A.,
WHITMORE G. A.
Publication year - 1970
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1970.tb00764.x
Subject(s) - risk aversion (psychology) , function (biology) , subjective expected utility , expected utility hypothesis , constant (computer programming) , risk seeking , optimal decision , economics , decision theory , mathematical economics , microeconomics , computer science , decision tree , finance , evolutionary biology , artificial intelligence , biology , programming language
This paper investigates the optimality of making two insurance decisions independently in the expected utility framework, when the two risks under consideration are independent. It is shown that when the disutility function embodies constant risk aversion, independent decision‐making is identical to optimal joint decision‐making. When the disutility function has strictly decreasing risk aversion, joint decision‐making is always not less conservative than independent decision‐making, and the opposite holds when the disutility function has strictly increasing risk aversion. Stronger results are obtained for some particular disutility functions. Finally, some implications of these results for empirical research in utility and decision theory are considered.