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A Good Sign for Multivariate Risk Taking

  • Louis Eeckhoudt

    ()

    (Facultés Universitaires Catholiques de Mons et Lille, Chaussée de Binche, 7000 Mons, Belgium and Center for Operations Research and Econometrics, Voie du Roman Pays 34, 1348 Louvain-la-Neuve, Belgium)

  • Béatrice Rey

    ()

    (Institut de Sciences Financières et d'Assurance, Université Lyon 1, 50 Avenue Tony Garnier, 69007 Lyon, France)

  • Harris Schlesinger

    ()

    (Department of Economics and Finance, University of Alabama, Tuscaloosa, Alabama 35487-0224)

Decisions under risk are often multidimensional, where the preferences of the decision maker depend on several attributes. For example, an individual might be concerned about both her level of wealth and the condition of her health. Many times the signs of successive cross-derivatives of a utility function play an important role in these models. However, there has not been a simple and intuitive interpretation for the meaning of such derivatives. The purpose of this paper is to give such an interpretation. In particular, we provide an equivalence between the signs of these cross-derivatives and individual preference within a particular class of simple lotteries.

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File URL: http://dx.doi.org/10.1287/mnsc.1060.0606
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 53 (2007)
Issue (Month): 1 (January)
Pages: 117-124

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Handle: RePEc:inm:ormnsc:v:53:y:2007:i:1:p:117-124
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  17. Valentino Dardanoni & Alan Wagstaff, 1987. "Uncertainty and the demand for medical care," Working Papers 028chedp, Centre for Health Economics, University of York.
  18. A. Sandmo, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Oxford University Press, vol. 37(3), pages 353-360.
  19. Beatrice Rey & Jean-Charles Rochet, 2004. "Health and Wealth: How do They Affect Individual Preferences?," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 29(1), pages 43-54, 06.
  20. Wagstaff, Adam & Paci, Pierella & van Doorslaer, Eddy, 1991. "On the measurement of inequalities in health," Social Science & Medicine, Elsevier, vol. 33(5), pages 545-557, January.
  21. Dardanoni, Valentino, 1988. "Optimal Choices under Uncertainty: The Case of Two-Argument Utility Functions," Economic Journal, Royal Economic Society, vol. 98(391), pages 429-50, June.
  22. Scott F. Richard, 1975. "Multivariate Risk Aversion, Utility Independence and Separable Utility Functions," Management Science, INFORMS, vol. 22(1), pages 12-21, September.
  23. Bleichrodt, Han & Crainich, David & Eeckhoudt, Louis, 2003. "The effect of comorbidities on treatment decisions," Journal of Health Economics, Elsevier, vol. 22(5), pages 805-820, September.
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