Loss Aversion and State-Dependent Linear Utility Functions for Monetary Returns
Theoretical Economics
2024-11-19 v3 Computer Science and Game Theory
Optimization and Control
Portfolio Management
Abstract
We present a theory of expected utility with state-dependent linear utility functions for monetary returns, that incorporates the possibility of loss-aversion. Our results relate to first order stochastic dominance, mean-preserving spread, increasing-concave linear utility profiles and risk aversion. As an application of the expected utility theory developed here, we analyze the contract that a monopolist would offer in an insurance market that allowed for partial coverage of loss.
Keywords
Cite
@article{arxiv.2410.19030,
title = {Loss Aversion and State-Dependent Linear Utility Functions for Monetary Returns},
author = {Somdeb Lahiri},
journal= {arXiv preprint arXiv:2410.19030},
year = {2024}
}
Comments
13 pages. Linearity for gains and linearity for losses are compatible with loss aversion. Ambiguity and aversion for it can be accommodated in our framework