Preserving preference rankings under non-financial background risk
We investigate the impact of a non-financial background risk 𝜀̃ on the preference rankings between two independent financial risks Open image in new window 1 and Open image in new window 2 for an expected-utility maximizer. More precisely, we provide necessary and sufficient conditions for the alternative (x0+ Open image in new window 1,y0+ 𝜀̃) to be preferred to (x0+ Open image in new window 2,y0+ 𝜀̃) whenever (x0+ Open image in new window 1,y0) is preferred to (x0+ Open image in new window 2,y0). Utility functions that preserve the preference rankings are fully characterized. Their practical relevance is discussed in light of recent results on the constraints for the modelling of the preference for the disaggregation of harms.
Keywordsdecision analysis multivariate risks background risk disaggregation of harms risk independence
The authors acknowledge helpful discussions and exchanges with L. Eeckhoudt, H. Schlesinger and B. Versaevel. All remaining errors are ours.
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