Tradeoffs for Downside Risk-Averse Decision-Makers and the Self-Protection Decision

Michel M Denuit (), Louis Eeckhoudt, Liqun Liu () and Jack Meyer ()
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Michel M Denuit: Institut de Sciences Actuarielles and Institut de Statistique, Université Catholique de Louvain, Louvain-la-Neuve B-1348, Belgium.
Liqun Liu: Private Enterprise Research Center, Texas A&M University, College Station, TX 77843, U.S.A.

The Geneva Risk and Insurance Review, 2016, vol. 41, issue 1, 19-47

Abstract: In addition to risk aversion, decision-makers tend to be also downside risk averse. Besides the usual size for risk trade-off, this allows several other trade-offs to be considered. The decision to increase the level of self-protection generates five trade-offs each involving an unfavourable downside risk increase and an accompanying beneficial change. Five stochastic orders that correspond to these trade-offs are defined, characterised and used to prove comparative static theorems that provide information concerning the self-protection decision. The five stochastic orders are general in nature and can be applied in any decision model where downside risk aversion is assumed.

Date: 2016
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Working Paper: Tradeoffs for Downside Risk-Averse Decision-Makers and the Self-Protection Decision (2016)
Working Paper: Tradeoffs for Downside Risk-Averse Decision-Makers and the Self-Protection Decision (2016)
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