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Decision-making under risk: when is utility maximization equivalent to risk minimization?

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  • Francesco Ruscitti
  • Ram Sewak Dubey
  • Giorgio Laguzzi

Abstract

Motivated by the analysis of a general optimal portfolio selection problem, which encompasses as special cases an optimal consumption and an optimal debt-arrangement problem, we are concerned with the questions of how a personality trait like risk-perception can be formalized and whether the two objectives of utility-maximization and risk-minimization can be both achieved simultaneously. We address these questions by developing an axiomatic foundation of preferences for which utility-maximization is equivalent to minimizing a utility-based shortfall risk measure. Our axiomatization hinges on a novel axiom in decision theory, namely the risk-perception axiom.

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  • Francesco Ruscitti & Ram Sewak Dubey & Giorgio Laguzzi, 2023. "Decision-making under risk: when is utility maximization equivalent to risk minimization?," Papers 2311.07269, arXiv.org.
    • Handle: RePEc:arx:papers:2311.07269
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    7. Kountzakis, C. & Polyrakis, I.A., 2013. "Coherent risk measures in general economic models and price bubbles," Journal of Mathematical Economics, Elsevier, vol. 49(3), pages 201-209.
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