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The monetary utility premium and interpersonal comparisons

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  • Li, Jingyuan
  • Liu, Liqun

Abstract

The utility premium is generally defined as the pain or reduction in expected utility caused by an nth-degree risk increase, where n≥2. While it is a very useful concept in understanding a decision maker’s choice in uncertain situations, the utility premium is not interpersonally comparable. This note shows that the monetary utility premium–the utility premium divided by the expected marginal utility at the random starting wealth–is interpersonally comparable, and the comparison is characterized by Ross more risk aversion of the corresponding degree.

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  • Li, Jingyuan & Liu, Liqun, 2014. "The monetary utility premium and interpersonal comparisons," Economics Letters, Elsevier, vol. 125(2), pages 257-260.
    • Handle: RePEc:eee:ecolet:v:125:y:2014:i:2:p:257-260
    DOI: 10.1016/j.econlet.2014.09.006
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    Cited by:

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    2. Baiardi, Donatella & De Donno, Marzia & Magnani, Marco & Menegatti, Mario, 2015. "New results on precautionary saving under two risks," Economics Letters, Elsevier, vol. 130(C), pages 17-20.
    3. Liqun Liu & William S. Neilson, 2019. "Alternative Approaches to Comparative n th-Degree Risk Aversion," Management Science, INFORMS, vol. 65(8), pages 3824-3834, August.
    4. Marzia Donno & Marco Magnani & Mario Menegatti, 2020. "Changes in multiplicative risks and optimal portfolio choice: new interpretations and results," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(1), pages 251-267, June.
    5. Christophe Courbage & Henri Loubergé & Béatrice Rey, 2018. "On the properties of high-order non-monetary measures for risks," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 77-94, May.
    6. Paan Jindapon & Liqun Liu & William S. Neilson, 2021. "Comparative risk apportionment," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 91-112, April.
    7. Wong, Kit Pong, 2021. "Comparative risk aversion with two risks," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    8. Heinzel, Christoph, 2023. "Comparing utility derivative premia under additive and multiplicative risks," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 23-40.
    9. Hylton, Keith N., 2023. "Mutual optimism and risk preferences in litigation," International Review of Law and Economics, Elsevier, vol. 75(C).

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    More about this item

    Keywords

    Utility premium; Risk aversion; Higher-degree risk aversion; Comparative risk aversion;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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