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The safety first expected utility model: Experimental evidence and economic implications

  • Levy, Haim
  • Levy, Moshe

Roy's [Roy, A., 1952. Safety first and the holding of assets. Econometrica 20 (3), 431-449] safety first criterion advocates the minimization of the probability of outcomes below a certain "disaster" level. This paper examines safety first theoretically and experimentally. We find that safety first plays a crucial role in decision-making, inducing choices that cannot be explained by, and even contradict, risk-aversion, Prospect Theory, and loss-aversion in general. Yet, safety first alone cannot explain individual choice. Therefore, we propose an expected utility - safety first (EU-SF) model where decisions are made based on a weighted average of the safety first criterion and standard expected utility maximization. We experimentally estimate these relative weights, and discuss their economic implications.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 8 (August)
Pages: 1494-1506

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:8:p:1494-1506
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