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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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