Risk preferences and changes in background risk |
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Authors: | Donald C Keenan Donald C Rudow Arthur Snow |
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Institution: | (1) Department of Economics, University of Georgia, Athens, GA 30602, USA |
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Abstract: | We present two theorems that yield necessary and sufficient conditions for first- and second-degree stochastic dominance deteriorations
of background risk to increase risk aversion with respect to foreground risk. We require that any change in a foreground risk
that is undesirable remains so after a background risk changes in a way that is either unfair, undesirable in the sense of
reducing expected utility, or undesirable in the sense of increasing expected marginal utility. Our results thus characterize
utility functions that are, respectively, vulnerable, proper, or standard with respect to changes in background risk.
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Keywords: | Expected utility Risk aversion Vulnerability Properness Standardness |
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