Risk taking with background risk under recursive rank-dependent utility

David Freeman

Mathematical Social Sciences, 2017, vol. 87, issue C, 72-74

Abstract: This paper examines how background risk affects risk taking under rank-dependent utility. I assume that a decision-maker facing a risk taking decision in the presence of background risk views these risks as composing a compound lottery, and recursively evaluates this compound lottery using rank-dependent utility. I show that adding background risk increases risk aversion whenever the utility-for-wealth function is risk vulnerable (Gollier and Pratt, 1996) in this model.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:87:y:2017:i:c:p:72-74

DOI: 10.1016/j.mathsocsci.2017.03.003

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