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Risk vulnerability: a graphical interpretation

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Abstract

The article gives a graphical interpretation of the concept of risk vulnerability. It shows that in a specific context of binary lotteries the assumption of risk vulnerability adds to prudence what the assumption of decreasing absolute risk aversion adds to risk aversion. We end the presentation showing that results can be extended to the concept of multiplicative risk vulnerability.

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References

  1. Franke G., Schlesinger H., Stapleton R. C. (2006) Multiplicative background risk. Management Science 52: 146–153

  2. Gollier C. (2001) The economics of risk and time. MIT Press, Cambridge, MA

  3. Gollier C., Pratt J. W. (1996) Risk vulnerability and the tempering effect of background risk. Econometrica 64: 1109–1124

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Author information

Correspondence to Béatrice Rey.

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Cite this article

Eeckhoudt, L., Rey, B. Risk vulnerability: a graphical interpretation. Theory Decis 71, 227–234 (2011). https://doi.org/10.1007/s11238-009-9173-z

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Keywords

  • Decreasing absolute risk aversion
  • Decreasing relative risk aversion
  • Prudence
  • Multiplicative risk vulnerability
  • Risk vulnerability