Related papers: Risk Apportionment: The Dual Story
Employing a generalized definition of Pratt (1964) and Arrow's (1965, 1971) probability premium, we introduce a new concept of attitude towards probability. We illustrate in a problem of risk sharing that whether attitude towards…
We propose a multivariate extension of Yaari's dual theory of choice under risk. We show that a decision maker with a preference relation on multidimensional prospects that preserves first order stochastic dominance and satisfies…
We consider portfolio optimization under a preference model in a single-period, complete market. This preference model includes Yaari's dual theory of choice and quantile maximization as special cases. We characterize when the optimal…
In frequently repeated matching scenarios, individuals may require diversification in their choices. Therefore, when faced with a set of potential outcomes, each individual may have an ideal lottery over outcomes that represents their…
There is a duality theory connecting certain stochastic orderings between cumulative distribution functions F_1,F_2 and stochastic orderings between their inverses F_1^(-1),F_2^(-1). This underlies some theories of utility in the case of…
We propose a definition of diversification as a binary relationship between financial portfolios. According to it, a convex linear combination of several risk positions with some weights is considered to be less risky than the probabilistic…
A family of models of individual discrete choice are constructed by means of statistical averaging of choices made by a subject in a reinforcement learning process, where the subject has short, k-term memory span. The choice probabilities…
Motivated by settings in which predictive models may be required to be non-discriminatory with respect to certain attributes (such as race), but even collecting the sensitive attribute may be forbidden or restricted, we initiate the study…
Portfolio diversification is a cornerstone of modern finance, while risk aversion is central to decision theory; both concepts are long-standing and foundational. We investigate their connections by studying how different forms of…
This paper exhibits a duality between the theory of Revealed Preference of Afriat and the housing allocation problem of Shapley and Scarf. In particular, it is shown that Afriat's theorem can be interpreted as a second welfare theorem in…
We introduce a model-free preference under ambiguity, as a primitive trait of behavior, which we apply once as well as repeatedly. Its single and double application yield simple, easily interpretable definitions of ambiguity aversion and…
Diversification represents the idea of choosing variety over uniformity. Within the theory of choice, desirability of diversification is axiomatized as preference for a convex combination of choices that are equivalently ranked. This…
We provide and axiomatize a representation for preferences over lotteries that generalizes the expected utility model. Since the representation uses different utility functions to evaluate different lotteries, the preferences can be…
In this work, we study a dynamic portfolio optimization problem related to pairs trading, which is an investment strategy that matches a long position in one security with a short position in another security with similar characteristics.…
It is essential to incorporate the impact of investor behavior when modeling the dynamics of asset returns. In this paper, we reconcile behavioral finance and rational finance by incorporating investor behavior within the framework of…
This paper investigates a novel behavioral feature of recursive preferences: aversion to risks that persist over time, or simply \textit{correlation aversion}. Greater persistence provides information about future consumption but reduces…
We consider a discrete-time dividend payout problem with risk sensitive shareholders. It is assumed that they are equipped with a risk aversion coefficient and construct their discounted payoff with the help of the exponential premium…
Under expected utility the local index of absolute risk aversion has played a central role in many applications. Besides, its link with the "global" concepts of the risk and probability premia has reinforced its attractiveness. This paper…
The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today's risk landscape makes a…
We study optimal risk sharing among $n$ agents endowed with distortion risk measures. Our model includes market frictions that can either represent linear transaction costs or risk premia charged by a clearing house for the agents. Risk…