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A Good Sign for Multivariate Risk Taking

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  • Louis Eeckhoudt

    ()
    (Facultés Universitaires Catholiques de Mons et Lille, Chaussée de Binche, 7000 Mons, Belgium and Center for Operations Research and Econometrics, Voie du Roman Pays 34, 1348 Louvain-la-Neuve, Belgium)

  • Béatrice Rey

    ()
    (Institut de Sciences Financières et d'Assurance, Université Lyon 1, 50 Avenue Tony Garnier, 69007 Lyon, France)

  • Harris Schlesinger

    ()
    (Department of Economics and Finance, University of Alabama, Tuscaloosa, Alabama 35487-0224)

Abstract

Decisions under risk are often multidimensional, where the preferences of the decision maker depend on several attributes. For example, an individual might be concerned about both her level of wealth and the condition of her health. Many times the signs of successive cross-derivatives of a utility function play an important role in these models. However, there has not been a simple and intuitive interpretation for the meaning of such derivatives. The purpose of this paper is to give such an interpretation. In particular, we provide an equivalence between the signs of these cross-derivatives and individual preference within a particular class of simple lotteries.

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File URL: http://dx.doi.org/10.1287/mnsc.1060.0606
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 53 (2007)
Issue (Month): 1 (January)
Pages: 117-124

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Handle: RePEc:inm:ormnsc:v:53:y:2007:i:1:p:117-124

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Keywords: correlation aversion; multivariate risk; prudence; risk aversion; temperance;

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