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Consistent modeling of risk averse behavior with spectral risk measures: Wächter/Mazzoni revisited

Mario Brandtner and Wolfgang Kürsten

European Journal of Operational Research, 2017, vol. 259, issue 1, 394-399

Abstract: Wächter and Mazzoni (2013) (W/M) have proposed a procedure to consistently link traditional expected utility (EU)-theory with modern spectral risk measures (SRMs). They construct a corresponding W/M-risk measure which induces the same preference ordering as the decision maker’s initial utility function does. In this note, we revisit W/M’s procedure and show that it violates the axiomatic foundation of the underlying decision rules: Within the general part of the procedure that builds on an auxiliary equivalent probability measure, the emerging W/M-risk measure does not satisfy the axiomatic properties of SRMs. The specific part of the procedure that singles out a preferred equivalent probability measure links two decision rules of which neither does the initial one respect the axioms of EU-theory, nor is the emerging one in line with the SRM-axioms.

Keywords: Decision support systems; Spectral risk measures; Expected utility theory; Consistency (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ejores:v:259:y:2017:i:1:p:394-399