Conditional Value-at-Risk Constraint and Loss Aversion Utility Functions
AbstractWe provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in a classic expected return maximization problem. For what we call the infimum of expectations class of risk measures, we show that if the decision maker (DM) maximizes the expectation of a random return under constraint that the risk measure is bounded above, he then behaves as a ``generalized expected utility maximizer'' in the following sense. The DM exhibits ambiguity with respect to a family of utility functions defined on a larger set of decisions than the original one; he adopts pessimism and performs first a minimization of expected utility over this family, then performs a maximization over a new decisions set. This economic behaviour is called ``Maxmin under risk'' and studied by Maccheroni (2002). This economic interpretation allows us to exhibit a loss aversion factor when the risk measure is the Conditional Value-at-Risk.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0906.3425.
Date of creation: Jun 2009
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-26 (All new papers)
- NEP-BEC-2009-09-26 (Business Economics)
- NEP-UPT-2009-09-26 (Utility Models & Prospect Theory)
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