The safety first expected utility model: Experimental evidence and economic implications

Haim Levy and Moshe Levy

Journal of Banking & Finance, 2009, vol. 33, issue 8, pages 1494-1506

Abstract: Roy's [Roy, A., 1952. Safety first and the holding of assets. Econometrica 20 (3), 431-449] safety first criterion advocates the minimization of the probability of outcomes below a certain "disaster" level. This paper examines safety first theoretically and experimentally. We find that safety first plays a crucial role in decision-making, inducing choices that cannot be explained by, and even contradict, risk-aversion, Prospect Theory, and loss-aversion in general. Yet, safety first alone cannot explain individual choice. Therefore, we propose an expected utility - safety first (EU-SF) model where decisions are made based on a weighted average of the safety first criterion and standard expected utility maximization. We experimentally estimate these relative weights, and discuss their economic implications.

Keywords: Safety; first; Asset; allocation; Equity; premium; CAPM; Risk; aversion; Loss; aversion; Stochastic; dominance (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jbfina:v:33:y:2009:i:8:p:1494-1506

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