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Health Investments Under Risk And Ambiguity

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  • Johansson-Stenman, Olof

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

This paper discusses how a decision maker should deal with uncertainty, both in the sense of a well-known probability distribution of different outcomes and as a situation where also the probability distribution is unknown. A simple baseline model is used throughout the paper, where the decision maker can invest in order to decrease the health risk. Since the investment is risky, the question concerns how much to invest. We derive and compare the optimal investment level for a number of different decision rules: a best guess rule, a maximin rule, an expected value rule, an expected utility rule, and three different rules that beyond risk aversion also reflect ambiguity aversion. Finally, these decision rules are evaluated more broadly.

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File URL: http://hdl.handle.net/2077/22322
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Bibliographic Info

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 443.

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Length: 42 pages
Date of creation: 04 May 2010
Date of revision:
Handle: RePEc:hhs:gunwpe:0443

Contact details of provider:
Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Keywords: Investment under uncertainty; risk aversion; ambiguity aversion;

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References

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  1. Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and Incompleteness of Financial Markets," Economics Series Working Papers 46, University of Oxford, Department of Economics.
  2. Treich, Nicolas, 2010. "The value of a statistical life under ambiguity aversion," Journal of Environmental Economics and Management, Elsevier, vol. 59(1), pages 15-26, January.
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  4. Al-Najjar, Nabil I. & Weinstein, Jonathan, 2009. "Rejoinder: The “Ambiguity Aversion Literature: A Critical Assessment”," Economics and Philosophy, Cambridge University Press, vol. 25(03), pages 357-369, November.
  5. Thibault Gajdos & Takashi Hayashi & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2006. "Attitude toward imprecise information," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) v06081, Université Panthéon-Sorbonne (Paris 1).
  6. Christian Gollier, 2011. "Portfolio Choices and Asset Prices: The Comparative Statics of Ambiguity Aversion," Review of Economic Studies, Oxford University Press, vol. 78(4), pages 1329-1344.
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  11. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  12. Schmidt, Ulrich & Starmer, Chris & Sugden, Robert, 2008. "Third-generation prospect theory," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 28932, Kiel Institute for the World Economy (IfW).
  13. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(1), pages 219-232, Winter.
  14. Richard B. Howarth, 2003. "Discounting and Uncertainty in Climate Change Policy Analysis," Land Economics, University of Wisconsin Press, vol. 79(3), pages 369-381.
  15. Daniel Kahneman & Richard H. Thaler, 2006. "Anomalies: Utility Maximization and Experienced Utility," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(1), pages 221-234, Winter.
  16. Chow, Clare Chua & Sarin, Rakesh K, 2001. " Comparative Ignorance and the Ellsberg Paradox," Journal of Risk and Uncertainty, Springer, Springer, vol. 22(2), pages 129-39, March.
  17. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 92(368), pages 805-24, December.
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