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Multidimensional Risk Aversion: The Cardinal Sin

Author

Listed:
  • Louis Raymond Eeckhoudt

    (Department of Economics (University of Verona))

  • Elisa Pagani

    (Department of Economics (University of Verona))

  • Eugenio Peluso

    (Department of Economics (University of Verona))

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. This result is then used to disentangle risk attitudes from the strength of the preferences, in the "intrinsic risk aversion" setting (Bell and Raiffa 1979).

Suggested Citation

  • Louis Raymond Eeckhoudt & Elisa Pagani & Eugenio Peluso, 2017. "Multidimensional Risk Aversion: The Cardinal Sin," Working Papers 12/2017, University of Verona, Department of Economics.
    • Handle: RePEc:ver:wpaper:12/2017
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    References listed on IDEAS

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    More about this item

    Keywords

    Multivariate Risk Aversion; Risk Premium; Intrinsic Risk aversion; Compensated Risk Aversion; Household Risk Aversion.;
    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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