Changes in Risky Benefits and in Risky Costs: A Question of the Right Order

Mario Menegatti and Richard Peter ()
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Richard Peter: Department of Finance, University of Iowa, Iowa City, Iowa 52242

Management Science, 2022, vol. 68, issue 5, 3625-3634

Abstract: We organize and extend findings on the comparative static effects of risk changes on optimal behavior in a unifying expected utility model. We determine restrictions on preferences for clear-cut results. Risk increases of a benefit are compensated by lowering exposure to risk. For risk increases of a cost, the response depends on the order of the risk change. This discrepancy arises because even-order risk increases of a cost raise the riskiness of the payoff distribution, whereas odd-order risk increases of a cost reduce it. We identify the stochastic dominance orders to resolve this discrepancy and discuss specific decision problems as applications.

Keywords: higher-order risk; risk aversion; comparative statics; decision making; stochastic dominance (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3625-3634

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