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Decreasing Downside Risk Aversion and Background Risk

Author

Listed:
  • David Crainich

    (CNRS-LEM and IESEG School of Management)

  • Louis Eeckhoudt

    (IESEG School of Management (LEM-CNRS) and and CORE (Université Catholique de Louvain))

  • Olivier Le Courtois

    (EM Lyon Business School)

Abstract

To analyze the impact of background risks, decreasing absolute risk aversion (DARA) must be combined with other restrictions on the shape of the utility function in order to make preferences risk vulnerable. In this note, we indicate that risk vulnerability can also be associated with the sole assumption of decreasing downside risk aversion (DDRA). That is, no matter how absolute risk aversion changes with wealth, DDDRA in the Arrow-Pratt sense and DDRA in the Ross sense are shown to be respectively necessary and sufficient for a background risk to raise the aversion to other independent risks.

Suggested Citation

  • David Crainich & Louis Eeckhoudt & Olivier Le Courtois, 2013. "Decreasing Downside Risk Aversion and Background Risk," Working Papers 2013-ECO-21, IESEG School of Management.
    • Handle: RePEc:ies:wpaper:e201321
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    Cited by:

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    2. Crainich, David & Eeckhoudt, Louis & Le Courtois, Olivier, 2017. "Health and portfolio choices: A diffidence approach," European Journal of Operational Research, Elsevier, vol. 259(1), pages 273-279.
    3. Christian Gollier & Miles S. Kimball, 2018. "Toward a Systematic Approach to the Economic Effects of Risk: Characterizing Utility Functions," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(2), pages 397-430, June.

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    JEL classification:

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

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