Skewness preference, risk taking and expected utility maximisationCitation formats

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Skewness preference, risk taking and expected utility maximisation. / Chiu, W. Henry.

In: GENEVA Risk and Insurance Review, Vol. 35, No. 2, 12.2010, p. 108-129.

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Chiu, WH 2010, 'Skewness preference, risk taking and expected utility maximisation', GENEVA Risk and Insurance Review, vol. 35, no. 2, pp. 108-129. https://doi.org/10.1057/grir.2009.9

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Chiu, W. Henry. / Skewness preference, risk taking and expected utility maximisation. In: GENEVA Risk and Insurance Review. 2010 ; Vol. 35, No. 2. pp. 108-129.

Bibtex

@article{f73d0cd1f9a64b0ea0bf6745622e7fad,
title = "Skewness preference, risk taking and expected utility maximisation",
abstract = "Available empirical evidence suggests that skewness preference plays an important role in understanding asset pricing and gambling. This paper establishes a skewness-comparability condition on probability distributions that is necessary and sufficient for any decision-maker's preferences over the distributions to depend on their means, variances, and third moments only. Under the condition, an Expected Utility maximizer's preferences for a larger mean, a smaller variance, and a larger third moment are shown to parallel, respectively, his preferences for a first-degree stochastic dominant improvement, a mean-preserving contraction, and a downside risk decrease and are characterized in terms of the von Neumann-Morgenstern utility function in exactly the same way. By showing that all Bernoulli distributions are mutually skewness comparable, we further show that in the wide range of economic models where these distributions are used individuals decisions under risk can be understood as trade-offs between mean, variance, and skewness. Our results on skewness-inducing transformations of random variables can also be applied to analyze the effects of progressive tax reforms on the incentive to make risky investments. {\circledC} 2010 The International Association for the Study of Insurance Economics.",
keywords = "downside risk, moment; gambling, risk aversion, skewness preference",
author = "Chiu, {W. Henry}",
year = "2010",
month = "12",
doi = "10.1057/grir.2009.9",
language = "English",
volume = "35",
pages = "108--129",
journal = "GENEVA Risk and Insurance Review",
issn = "1554-9658",
publisher = "Palgrave Macmillan Ltd.",
number = "2",

}

RIS

TY - JOUR

T1 - Skewness preference, risk taking and expected utility maximisation

AU - Chiu, W. Henry

PY - 2010/12

Y1 - 2010/12

N2 - Available empirical evidence suggests that skewness preference plays an important role in understanding asset pricing and gambling. This paper establishes a skewness-comparability condition on probability distributions that is necessary and sufficient for any decision-maker's preferences over the distributions to depend on their means, variances, and third moments only. Under the condition, an Expected Utility maximizer's preferences for a larger mean, a smaller variance, and a larger third moment are shown to parallel, respectively, his preferences for a first-degree stochastic dominant improvement, a mean-preserving contraction, and a downside risk decrease and are characterized in terms of the von Neumann-Morgenstern utility function in exactly the same way. By showing that all Bernoulli distributions are mutually skewness comparable, we further show that in the wide range of economic models where these distributions are used individuals decisions under risk can be understood as trade-offs between mean, variance, and skewness. Our results on skewness-inducing transformations of random variables can also be applied to analyze the effects of progressive tax reforms on the incentive to make risky investments. © 2010 The International Association for the Study of Insurance Economics.

AB - Available empirical evidence suggests that skewness preference plays an important role in understanding asset pricing and gambling. This paper establishes a skewness-comparability condition on probability distributions that is necessary and sufficient for any decision-maker's preferences over the distributions to depend on their means, variances, and third moments only. Under the condition, an Expected Utility maximizer's preferences for a larger mean, a smaller variance, and a larger third moment are shown to parallel, respectively, his preferences for a first-degree stochastic dominant improvement, a mean-preserving contraction, and a downside risk decrease and are characterized in terms of the von Neumann-Morgenstern utility function in exactly the same way. By showing that all Bernoulli distributions are mutually skewness comparable, we further show that in the wide range of economic models where these distributions are used individuals decisions under risk can be understood as trade-offs between mean, variance, and skewness. Our results on skewness-inducing transformations of random variables can also be applied to analyze the effects of progressive tax reforms on the incentive to make risky investments. © 2010 The International Association for the Study of Insurance Economics.

KW - downside risk

KW - moment; gambling

KW - risk aversion

KW - skewness preference

U2 - 10.1057/grir.2009.9

DO - 10.1057/grir.2009.9

M3 - Article

VL - 35

SP - 108

EP - 129

JO - GENEVA Risk and Insurance Review

JF - GENEVA Risk and Insurance Review

SN - 1554-9658

IS - 2

ER -