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Risk attitudes and the value of risk transformations
Author(s) -
Denuit Michel M.,
Eeckhoudt Louis
Publication year - 2013
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2013.12017.x
Subject(s) - stochastic dominance , economics , arrow , risk aversion (psychology) , willingness to pay , value (mathematics) , econometrics , dominance (genetics) , time consistency , expected utility hypothesis , expected shortfall , willingness to accept , actuarial science , microeconomics , mathematics , mathematical economics , risk management , statistics , computer science , finance , chemistry , biochemistry , gene , programming language
An increase in risk aversion, defined by a concavification of the utility function, does not always increase the willingness to pay (WTP) for a mean‐preserving reduction in risk. This is why Ross ([Ross, S. A., 1981]) proposed a stronger measure of increased risk aversion that maintains for mean‐preserving changes in risk the result obtained by Arrow ([Arrow, K. J., 1965]) and Pratt ([Pratt, J. W., 1964]) for risk elimination. Ross's ([Ross, S. A., 1981]) contribution was later extended to higher orders using Ekern's ([Ekern, S., 1980]) notion of a higher‐degree increase in risk. In this paper, we show that these measures remain valid under less restrictive assumptions than those implied by Ekern's ([Ekern, S., 1980]) approach and we refer to the concept of mean‐preserving stochastic dominance. Finally, we also extend the analysis conducted for the WTP to the willingness to accept.