Decision-making under risk: when is utility-maximization equivalent to risk-minimization?

Francesco Ruscitti (), Ram Dubey () and Giorgio Laguzzi ()
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Francesco Ruscitti: John Cabot University
Giorgio Laguzzi: University of Eastern Piedmont

Theory and Decision, 2024, vol. 97, issue 1, No 2, 23-38

Abstract: Abstract Motivated by the analysis of a general optimal portfolio selection problem, which encompasses as special cases an optimal consumption and an optimal debt-arrangement problem, we are concerned with the questions of how a personality trait like risk-perception can be formalized and whether the two objectives of utility-maximization and risk-minimization can be both achieved simultaneously. We address these questions by developing an axiomatic foundation of preferences for which utility-maximization is equivalent to minimizing a utility-based shortfall risk measure. Our axiomatization hinges on a novel axiom in decision theory, namely the risk-perception axiom.

Keywords: Financial position; Fundamental theorem of asset pricing; Coherent risk measure; Utility-based shortfall risk measure; Risk-perception axiom (search for similar items in EconPapers)
Date: 2024
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Working Paper: Decision-making under risk: when is utility maximization equivalent to risk minimization? (2023)
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DOI: 10.1007/s11238-023-09969-1

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