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A note on the comparative statics approach to nth-degree risk aversion

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  • Liu, Liqun
  • Wang, Jianli

Abstract

Jindapon and Neilson (2007) propose a comparative statics approach to nth-degree risk aversion. They consider a decision problem where an agent incurs either a monetary or a utility cost to reduce the nth-degree risk in his payoff. They find that, when the cost is monetary, one agent always invests more in risk reduction than another if and only if the former is nth-degree Ross more risk averse than the latter, but this is not the case when the cost takes the form of utility reductions. We show that, within an appropriately normalized risk-reducing problem with a utility cost, individuals’ relative optimal risk-reducing efforts are also governed by the nth-degree Ross more risk aversion.

Suggested Citation

  • Liu, Liqun & Wang, Jianli, 2017. "A note on the comparative statics approach to nth-degree risk aversion," Economics Letters, Elsevier, vol. 159(C), pages 116-118.
    • Handle: RePEc:eee:ecolet:v:159:y:2017:i:c:p:116-118
    DOI: 10.1016/j.econlet.2017.07.023
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    References listed on IDEAS

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    1. Modica, Salvatore & Scarsini, Marco, 2005. "A note on comparative downside risk aversion," Journal of Economic Theory, Elsevier, vol. 122(2), pages 267-271, June.
    2. Denuit, Michel & Eeckhoudt, Louis, 2010. "Stronger measures of higher-order risk attitudes," LIDAM Discussion Papers ISBA 2010010, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    3. Denuit, Michel M. & Eeckhoudt, Louis, 2010. "Stronger measures of higher-order risk attitudes," Journal of Economic Theory, Elsevier, vol. 145(5), pages 2027-2036, September.
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    5. Charles N. Noussair & Stefan T. Trautmann & Gijs van de Kuilen, 2014. "Higher Order Risk Attitudes, Demographics, and Financial Decisions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 325-355.
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    12. Jindapon, Paan & Neilson, William S., 2007. "Higher-order generalizations of Arrow-Pratt and Ross risk aversion: A comparative statics approach," Journal of Economic Theory, Elsevier, vol. 136(1), pages 719-728, September.
    13. Ross, Stephen A, 1981. "Some Stronger Measures of Risk Aversion in the Small and the Large with Applications," Econometrica, Econometric Society, vol. 49(3), pages 621-638, May.
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    Cited by:

    1. Dennis W. Jansen & Liqun Liu, 2022. "Portfolio choice in the model of expected utility with a safety-first component," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 45(1), pages 187-207, June.
    2. Wang, Jianli & Wang, Hongxia & Yick, Ho Yin, 2019. "How do changes in risk and risk aversion affect self-protection with Selden/Kreps–Porteus preferences?," Insurance: Mathematics and Economics, Elsevier, vol. 88(C), pages 1-6.
    3. Wang, Hongxia & Zhou, Lin & Dai, Peng-Fei & Xiong, Xiong, 2022. "Moment conditions for fractional degree stochastic dominance," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Risk aversion; nth-degree risk aversion; Comparative statics; Increase in risk;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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