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Expected Utility and Catastrophic Risk

Masako Ikefuji, Roger Laeven, Jan Magnus () and Chris Muris

No 14-133/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: An expected utility based cost-benefit analysis is in general fragile to its distributional assumptions. We derive necessary and sufficient conditions on the utility function of the expected utility model to avoid this. The conditions ensure that expected (marginal) utility remains finite also under heavy-tailed distributional assumptions. Our results are context-free and are relevant to many fields encountering catastrophic risk analysis, such as, perhaps most noticeably, insurance and risk management.

Keywords: Expected utility; Catastrophe; Cost-benefit analysis; Risk management; Power utility; Exponential utility; Heavy tails (search for similar items in EconPapers)
JEL-codes: D61 D81 G10 G20 Q5 (search for similar items in EconPapers)
Date: 2014-10-14
New Economics Papers: this item is included in nep-mic, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20140133

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