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A Good Sign for Multivariate Risk Taking

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  • Louis Eeckhoudt
  • Béatrice Rey
  • Harris Schlesinger

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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1796.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1796

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

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  1. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, Econometric Society, vol. 61(3), pages 589-611, May.
  2. Viscusi, W Kip & Evans, William N, 1990. "Utility Functions That Depend on Health Status: Estimates and Economic Implications," American Economic Review, American Economic Association, American Economic Association, vol. 80(3), pages 353-74, June.
  3. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 53-73, January.
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  5. Dardanoni, Valentino & Wagstaff, Adam, 1990. "Uncertainty and the demand for medical care," Journal of Health Economics, Elsevier, Elsevier, vol. 9(1), pages 23-38, June.
  6. Moyes, Patrick, 2012. "Comparisons of heterogeneous distributions and dominance criteria," Journal of Economic Theory, Elsevier, Elsevier, vol. 147(4), pages 1351-1383.
  7. Evans, William N & Viscusi, W Kip, 1991. "Estimation of State-Dependent Utility Functions Using Survey Data," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 94-104, February.
  8. Atkinson, Anthony B & Bourguignon, Francois, 1982. "The Comparison of Multi-Dimensioned Distributions of Economic Status," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(2), pages 183-201, April.
  9. Wagstaff, Adam & Paci, Pierella & van Doorslaer, Eddy, 1991. "On the measurement of inequalities in health," Social Science & Medicine, Elsevier, Elsevier, vol. 33(5), pages 545-557, January.
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  11. DREZE, Jacques H. & MODIGLIANI, Franco, . "Cosumption decisions under uncertainty," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -119, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. BLEICHRODT, Han & CRAINICH, David & EECKHOUDT, Louis, . "The effect of comorbidities on treatment decisions," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1668, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Louis Eeckhoudt & Harris Schlesinger, 2006. "Putting Risk in Its Proper Place," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 280-289, March.
  14. Robert Eisner & Robert H. Strotz, 1961. "Flight Insurance and the Theory of Choice," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 69, pages 355.
  15. Miles S. Kimball, 1991. "Precautionary Motives for Holding Assets," NBER Working Papers 3586, National Bureau of Economic Research, Inc.
  16. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  17. Scott F. Richard, 1975. "Multivariate Risk Aversion, Utility Independence and Separable Utility Functions," Management Science, INFORMS, INFORMS, vol. 22(1), pages 12-21, September.
  18. Dardanoni, Valentino, 1988. "Optimal Choices under Uncertainty: The Case of Two-Argument Utility Functions," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 98(391), pages 429-50, June.
  19. Larry G. Epstein & Stephen M. Tanny, 1980. "Increasing Generalized Correlation: A Definition and Some Economic Consequences," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 13(1), pages 16-34, February.
  20. Béatrice Rey & Jean-Charles Rochet, 2004. "Health and Wealth: How do They Affect Individual Preferences?," The Geneva Papers on Risk and Insurance Theory, Springer, Springer, vol. 29(1), pages 43-54, 06.
  21. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
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