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

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  • Levy, Haim
  • Levy, Moshe

Abstract

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.

Suggested Citation

  • Levy, Haim & Levy, Moshe, 2009. "The safety first expected utility model: Experimental evidence and economic implications," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1494-1506, August.
  • Handle: RePEc:eee:jbfina:v:33:y:2009:i:8:p:1494-1506
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    Cited by:

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    2. Darolles, Serge & Gourieroux, Christian, 2010. "Conditionally fitted Sharpe performance with an application to hedge fund rating," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 578-593, March.
    3. Christophe Boucher & Gregory Jannin & Patrick Kouontchou & Bertrand Maillet, 2013. "An Economic Evaluation of Model Risk in Long-term Asset Allocations," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 475-491, August.
    4. Vermeulen, Robert, 2013. "International diversification during the financial crisis: A blessing for equity investors?," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 104-123.
    5. Enrico Diecidue & Moshe Levy & Jeroen Ven, 2015. "No aspiration to win? An experimental test of the aspiration level model," Journal of Risk and Uncertainty, Springer, vol. 51(3), pages 245-266, December.
    6. Anthonisz, Sean A., 2012. "Asset pricing with partial-moments," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2122-2135.
    7. Briner, Simon & Finger, Robert, 2012. "Bio-economic modelling of decisions under yield and price risk for suckler cow farms," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122547, European Association of Agricultural Economists.
    8. Huang, Wei & Liu, Qianqiu & Ghon Rhee, S. & Wu, Feng, 2012. "Extreme downside risk and expected stock returns," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1492-1502.
    9. Tessema, Yohannis & Asafu-Adjaye, John & Rodriguez, Daniel & Mallawaarachchi, Thilak & Shiferaw, Bekele, 2015. "A bio-economic analysis of the benefits of conservation agriculture: The case of smallholder farmers in Adami Tulu district, Ethiopia," Ecological Economics, Elsevier, vol. 120(C), pages 164-174.

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