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Multidimensional Risk Aversion: The Cardinal Sin

Louis Raymond Eeckhoudt, Elisa Pagani () and Eugenio Peluso ()
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Louis Raymond Eeckhoudt: Department of Economics (University of Verona)
Elisa Pagani: Department of Economics (University of Verona)

No 12/2017, Working Papers from University of Verona, Department of Economics

Abstract: Attitudes towards multidimensional risk depend both on the shape of the indifference map under certainty and on the degree of concavity of the utility function representing preferences under risk. A decomposition of the risk premium is built on the new notion of "compensated risk aversion". The balance between the two components is shown to depend on the association of the risks. This result is then used to disentangle risk attitudes from the strength of the preferences, in the "intrinsic risk aversion" setting (Bell and Raiffa 1979).

Keywords: Multivariate Risk Aversion; Risk Premium; Intrinsic Risk aversion; Compensated Risk Aversion; Household Risk Aversion. (search for similar items in EconPapers)
JEL-codes: D01 D11 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ore, nep-rmg and nep-upt
Date: 2017-07
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