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Changes in multiplicative background risk and risk-taking behavior

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  • Octave Jokung

Abstract

This article analyzes the conditions under which any change in a multiplicative background risk induces a more cautious behavior. We give necessary and sufficient conditions under which any change in the multiplicative background risk with respect to the Nth-degree stochastic dominance raises local risk aversion. Surprisingly, decreasing relative risk aversion of any order up to N in the sense of Pratt (Econometrica 32:122–136, 1964 ) coupled with decreasing relative risk aversion in the sense of Ross (Econometrica 49:631–638, 1981 ) are sufficient to guarantee an increase in local risk aversion after any deterioration of the multiplicative background risk thanks to the Nth-degree stochastic dominance. We link our results concerning second-order stochastic dominance with the concept of multiplicative risk vulnerability. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Octave Jokung, 2013. "Changes in multiplicative background risk and risk-taking behavior," Theory and Decision, Springer, vol. 74(1), pages 127-149, January.
    • Handle: RePEc:kap:theord:v:74:y:2013:i:1:p:127-149
    DOI: 10.1007/s11238-012-9336-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Background risk; Comparative risk; Increase in risk; Risk aversion; Risk vulnerability; Stochastic dominance; D81;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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