Degree of downside risk aversion and self-protection

Research output: Contribution to journalArticle

Abstract

This paper shows that, identifying individuals with their utility functions, - v‴(x)/v″(x) ≤ -u‴(x)/u″(x) for all x implies that individual v's optimal choice of self-protection expenditure is larger than individual u's, provided that marginal increases in self-protection expenditure from u's optimal choice are mean-preserving. The result clarifies the relationship between self-protection and downside risk aversion and underscores the interpretation of - u‴(x)/u″(x) as a measure of the strength of u's downside risk aversion relative to his own risk aversion because a mean-preserving increase in self-protection expenditure is shown to effect a special combination of a downside risk increase and a mean-preserving contraction. © 2004 Elsevier B.V. All rights reserved.

Bibliographical metadata

Original languageEnglish
Pages (from-to)93-101
Number of pages8
JournalInsurance: Mathematics and Economics
Volume36
Issue number1
DOIs
Publication statusPublished - 22 Feb 2005