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

Denuit, Michel;Eeckhoudt, Louis;Liu, Liqun;Meyer, Jack
(2016) The Geneva Risk and Insurance Review — Vol. 41, n° 1, p. 19-47 (2016)

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Authors
  • Denuit, MichelUCLouvain
    Author
  • Eeckhoudt, Louis
    Author
  • Liu, Liqun
    Author
  • Meyer, Jack
    Author
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.
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Denuit, M., Eeckhoudt, L., Liu, L., & Meyer, J. (2016). Tradeoffs for Downside Risk-Averse Decision-Makers and the Self-Protection Decision. The Geneva Risk and Insurance Review, 41(1), 19-47. https://doi.org/10.1057/grir.2015.3 (Original work published 2016)