Preserving preference rankings under non-financial background risk

Yannick Malevergne and Beatrice Rey ()

Journal of the Operational Research Society, 2010, vol. 61, issue 8, 1302-1308

Abstract: Abstract We investigate the impact of a non-financial background risk 𝜀̃ on the preference rankings between two independent financial risks 1 and 2 for an expected-utility maximizer. More precisely, we provide necessary and sufficient conditions for the alternative (x 0+ 1,y 0+ 𝜀̃) to be preferred to (x 0+ 2,y 0+ 𝜀̃) whenever (x 0+ 1,y 0) is preferred to (x 0+ 2,y 0). Utility functions that preserve the preference rankings are fully characterized. Their practical relevance is discussed in light of recent results on the constraints for the modelling of the preference for the disaggregation of harms.

Keywords: decision analysis; multivariate risks; background risk; disaggregation of harms; risk independence (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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DOI: 10.1057/jors.2009.95

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