Risk apportionment: The dual story

Louis R. Eeckhoudt, Roger Laeven and Harris Schlesinger

Journal of Economic Theory, 2020, vol. 185, issue C

Abstract: By specifying new model free preferences towards simple nested classes of lottery pairs, we develop the dual story to stand on equal footing with that of (primal) risk apportionment. The dual story provides an intuitive interpretation, and full characterization, of dual counterparts of such concepts as prudence and temperance. The direction of preference between these nested classes of lottery pairs is equivalent to signing the successive derivatives of the probability weighting function within Yaari's (1987) dual theory. We explore implications of our results for optimal portfolio choice and show that the sign of the third derivative of the probability weighting function may be naturally linked to a self-protection problem.

Keywords: Higher order risk attitudes; Prudence; Temperance; Risk apportionment; Non-expected utility theory; Portfolio choice (search for similar items in EconPapers)
JEL-codes: D81 G11 G22 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: Risk Apportionment: The Dual Story (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:185:y:2020:i:c:s0022053119301218

DOI: 10.1016/j.jet.2019.104971

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