DISTORTION RISK MEASURES, AMBIGUITY AVERSION AND OPTIMAL EFFORT

Christian Y. Robert and Pierre-Emmanuel Thérond

ASTIN Bulletin, 2014, vol. 44, issue 2, 277-302

Abstract: We consider the class of concave distortion risk measures to study how choice is influenced by the decision-maker's attitude to risk and provide comparative statics results. We also assume ambiguity about the probability distribution of the risk and consider a framework à la Klibanoff, Marinacci and Mukerji (2005; A smooth model of decision making under ambiguity. Econometrica, 73, 1849–1892) to study the value of information that resolves ambiguity. We show that this value increases with greater ambiguity, with greater ambiguity aversion, and in some cases with greater risk aversion. Finally, we examine whether a more risk-averse and a more ambiguity-averse individual will invest in more effort to shift his initial risk distribution to a better target distribution.

Date: 2014
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Working Paper: Distortion risk measures, ambiguity aversion and optimal effort (2014)
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