The safety first expected utility model: Experimental evidence and economic implications |
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Authors: | Haim Levy Moshe Levy |
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Affiliation: | Jerusalem School of Business Administration, The Hebrew University, Jerusalem 91905, Israel |
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Abstract: | Roy’s [Roy, A., 1952. Safety first and the holding of assets. Econometrica 20 (3), 431–449] safety first criterion advocates the minimization of the probability of outcomes below a certain “disaster” level. This paper examines safety first theoretically and experimentally. We find that safety first plays a crucial role in decision-making, inducing choices that cannot be explained by, and even contradict, risk-aversion, Prospect Theory, and loss-aversion in general. Yet, safety first alone cannot explain individual choice. Therefore, we propose an expected utility – safety first (EU–SF) model where decisions are made based on a weighted average of the safety first criterion and standard expected utility maximization. We experimentally estimate these relative weights, and discuss their economic implications. |
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Keywords: | D81 C91 |
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