Preserving preference rankings under non-financial background risk

Yannick Malevergne and Beatrice Rey ()

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Abstract: We investigate the impact of a non-financial background risk ˜" on the preference rankings between two independent financial risks ˜z1 and ˜z2 for an expected-utility maximizer. More precisely, we provide necessary and sufficient conditions for the alternative (x0 + ˜z1, y0 + ˜") to be preferred to (x0 + ˜z2, y0 + ˜") whenever (x0 + ˜z1, y0) is preferred to (x0 + ˜z2, y0). 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 modeling of the preference for the disaggregation of harms.

Keywords: Multivariate risk; Background risk; Disaggregation of harms; Risk independence (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00520072v1
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Citations: View citations in EconPapers (4)

Published in Journal of the Operational Research Society, 2010, 61, pp.1302-1308. ⟨10.1057/jors.2009.95⟩

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Journal Article: Preserving preference rankings under non-financial background risk (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00520072

DOI: 10.1057/jors.2009.95

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