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Multidimensional risk aversion: the cardinal sin

Author

Listed:
  • Louis Eeckhoudt

    (IÉSEG School of Management)

  • Elisa Pagani

    (University of Verona)

  • Eugenio Peluso

    (LISER-Luxembourg Institute of Socio Economic Research
    University of Verona
    University of Luxembourg)

Abstract

Attitudes towards multidimensional risk depend both on the shape of the indifference map under certainty and on the degree of concavity of the utility function representing preferences under risk. A decomposition of the risk premium is built on the new notion of “compensated risk aversion”. The balance between the two components is shown to depend on the association of the risks. Several applications are also presented, including the intertemporal model.

Suggested Citation

  • Louis Eeckhoudt & Elisa Pagani & Eugenio Peluso, 2023. "Multidimensional risk aversion: the cardinal sin," Annals of Operations Research, Springer, vol. 320(1), pages 15-31, January.
    • Handle: RePEc:spr:annopr:v:320:y:2023:i:1:d:10.1007_s10479-022-04863-5
    DOI: 10.1007/s10479-022-04863-5
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    More about this item

    Keywords

    Utility theory; Multivariate risk aversion; Risk premium; Compensated risk aversion; Strength of preferences; Intertemporal risk attitude;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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