Allocative Downside Risk Aversion

Richard Watt () and Francisco J. Vazquez

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Traditionally, downside risk aversion is the study of the placement of a pure risk (a secondary risk) on either the upside or the downside of a primary two-state risk. When the decision maker prefers to have the secondary risk placed on the upside rather than the downside of the primary lottery, he is said to display downside risk aversion. The literature on the intensity of downside risk aversion has been clear on the point that greater prudence is not equivalent to greater downside risk aversion, although the two concepts are linked. In the present paper we present a new, and we argue equally natural, concept of the downside risk aversion of a decision maker, namely the fraction of a zero mean risk that the decision maker would optimally place on the upside. We then consider how this measure can be used to identify the intensity of downside risk aversion. Specifically, we show that greater downside risk aversion in our model can be accurately measured by a relationship that is very similar to, although somewhat stronger than, greater prudence.

Keywords: risk aversion; prudence; downside risk (search for similar items in EconPapers)
JEL-codes: D8 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2010-05-14
New Economics Papers: this item is included in nep-rmg and nep-upt
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https://repec.canterbury.ac.nz/cbt/econwp/1061.pdf (application/pdf)

Related works:
Journal Article: Allocative downside risk aversion (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:10/61

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