Tradeoffs for Downside Risk-Averse Decision-Makers and the Self-Protection Decision |
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Authors: | Michel M Denuit Louis Eeckhoudt Liqun Liu Jack Meyer |
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Institution: | 1.Institut de Sciences Actuarielles and Institut de Statistique, Université Catholique de Louvain,Louvain-la-Neuve,Belgium;2.IESEG School of Management, LEM,Lille,France;3.CORE, Université Catholique de Louvain,Louvain-la-Neuve,Belgium;4.Private Enterprise Research Center, Texas A&M University,College Station,U.S.A.;5.Department of Economics,Michigan State University,East Lansing,U.S.A. |
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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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