Certain and uncertain utility: A new perspective on financial innovation
Economics Letters, 2017, vol. 158, issue C, 7-9
We show that discontinuous preference over certain and uncertain outcomes (as in Andreoni and Sprenger, 2009, 2012) have interesting implications for financial innovations. It motivates financial innovations aimed at carving riskless assets from risky ones. If improbable risks are neglected, then excess carving may take place with disastrous subsequent consequences.
Keywords: Certain utility; Uncertain utility; Financial innovation (search for similar items in EconPapers)
JEL-codes: D81 D90 G01 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:158:y:2017:i:c:p:7-9
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