The impact of prudence on optimal prevention
What are the determinants of the optimal level of effort to reduce the probability of a loss to occur? Whereas most of the literature on this question focused on risk aversion, we show that the concept of prudence (i.e., a positive third derivative of the utility function) is essential to answer this question. We explain in this paper that prudence and prevention tend to be opponents rather than allies contrary to the intuition attached to everyday language. Copyright Springer-Verlag Berlin/Heidelberg 2005
Volume (Year): 26 (2005)
Issue (Month): 4 (November)
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