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Certain and uncertain utility: A new perspective on financial innovation

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  • Siddiqi, Hammad

Abstract

We show that discontinuous preference over certain and uncertain outcomes (as in Andreoni and Sprenger, 2009, 2012) have interesting implications for financial innovations. It motivates financial innovations aimed at carving riskless assets from risky ones. If improbable risks are neglected, then excess carving may take place with disastrous subsequent consequences.

Suggested Citation

  • Siddiqi, Hammad, 2017. "Certain and uncertain utility: A new perspective on financial innovation," Economics Letters, Elsevier, vol. 158(C), pages 7-9.
    • Handle: RePEc:eee:ecolet:v:158:y:2017:i:c:p:7-9
    DOI: 10.1016/j.econlet.2017.06.009
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    References listed on IDEAS

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    1. John Quiggin, 2016. "The value of information and the value of awareness," Theory and Decision, Springer, vol. 80(2), pages 167-185, February.
    2. Uri Gneezy & John A. List & George Wu, 2006. "The Uncertainty Effect: When a Risky Prospect is Valued Less than its Worst Possible Outcome," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1283-1309.
    3. Serfilippi, Elena & Carter, Michael & Guirkinger, Catherine, 2015. "Certain and Uncertain Utility and Insurance Demand: Results From a Framed Field Experiment in Burkina Faso," 2015 Conference, August 9-14, 2015, Milan, Italy 211384, International Association of Agricultural Economists.
    4. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
    5. James Andreoni & Charles Sprenger, 2012. "Risk Preferences Are Not Time Preferences," American Economic Review, American Economic Association, vol. 102(7), pages 3357-3376, December.
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    Cited by:

    1. Hammad, Siddiqi & Austin, Murphy, 2020. "Optimal Resource Allocation in the Brain and the Capital Asset Pricing Model," MPRA Paper 102705, University Library of Munich, Germany.

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    More about this item

    Keywords

    Certain utility; Uncertain utility; Financial innovation;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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