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Prudence, temperance, edginess, and risk apportionment as decreasing sensitivity to detrimental changes

  • Denuit, Michel
  • Rey, Béatrice
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    This paper shows that the notions of prudence, temperance, edginess, and, more generally, risk apportionment of any degree are the consequences of the natural idea that the sensitivity to detrimental changes should decrease with initial wealth. In the setting of Epstein and Tanny (1980), this turns out to be equivalent to the supermodularity of the expected utility for some specific 4-state lotteries.

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    Article provided by Elsevier in its journal Mathematical Social Sciences.

    Volume (Year): 60 (2010)
    Issue (Month): 2 (September)
    Pages: 137-143

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    Handle: RePEc:eee:matsoc:v:60:y:2010:i:2:p:137-143
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    1. Louis Eeckhoudt & Harris Schlesinger & Ilia Tsetlin, 2008. "Apportioning of Risks via Stochastic Dominance," CESifo Working Paper Series 2467, CESifo Group Munich.
    2. DENUIT, Michel & EECKHOUDT, Louis & REY, Béatrice, . "Some consequences of correlation aversion in decision science," CORE Discussion Papers RP 2207, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
    4. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
    5. Louis Eeckhoudt & Harris Schlesinger, 2005. "Putting Risk in its Proper Place," CESifo Working Paper Series 1462, CESifo Group Munich.
    6. Denuit, Michel & Vylder, Etienne De & Lefevre, Claude, 1999. "Extremal generators and extremal distributions for the continuous s-convex stochastic orderings," Insurance: Mathematics and Economics, Elsevier, vol. 24(3), pages 201-217, May.
    7. Dhaene, Jan & Denuit, Michel, 1999. "The safest dependence structure among risks," Insurance: Mathematics and Economics, Elsevier, vol. 25(1), pages 11-21, September.
    8. Doherty, Neil A & Schlesinger, Harris, 1983. "Optimal Insurance in Incomplete Markets," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 1045-54, December.
    9. 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.
    10. Caballé, Jordi & Pomansky, Alexey, 1995. "Mixed Risk Aversion," Working Paper Series 444, Research Institute of Industrial Economics.
    11. Han Bleichrodt & Louis Eeckhoudt, 2005. "Saving under rank-dependent utility," Economic Theory, Springer, vol. 25(2), pages 505-511, 02.
    12. Larry G. Epstein & Stephen M. Tanny, 1980. "Increasing Generalized Correlation: A Definition and Some Economic Consequences," Canadian Journal of Economics, Canadian Economics Association, vol. 13(1), pages 16-34, February.
    13. Jones-Lee, Michael W, 1974. "The Value of Changes in the Probability of Death or Injury," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 835-49, July/Aug..
    14. L. Eeckhoudt & H. Schlesinger, 2006. "Putting risk in its proper place," Post-Print hal-00283170, HAL.
    15. Lajeri-Chaherli, Fatma, 2004. "Proper prudence, standard prudence and precautionary vulnerability," Economics Letters, Elsevier, vol. 82(1), pages 29-34, January.
    16. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
    17. Chiu, W.Henry, 2005. "Degree of downside risk aversion and self-protection," Insurance: Mathematics and Economics, Elsevier, vol. 36(1), pages 93-101, February.
    18. Marie-Cécile Fagart & Bernard Sinclair-Desgagné, 2007. "Ranking Contingent Monitoring Systems," Management Science, INFORMS, vol. 53(9), pages 1501-1509, September.
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