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

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Denuit, Michel | Eeckhoudt, Louis | Liu, Liqun | Meyer, Jack

Edité par HAL CCSD ; Palgrave Macmillan

International audience. 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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