Related papers: Background risk and small-stakes risk aversion
As we know, there is a controversy about the decision making under risk between economists and psychologists. We discuss to build a unified theory of risky choice, which would explain both of compensatory and non-compensatory theories. For…
Actual individual preferences are neither complete (=total) nor antisymmetric in general, so that at least every quasi-order must be an admissible input to a satisfactory choice rule. It is argued that the traditional notion of…
We are living in an uncertain and dynamically changing world, where optimal decision-making under uncertainty is directly linked to the survival of species. However, evolutionary selection pressures that shape value-based decision-making…
The Allais and Ellsberg paradoxes show that the expected utility hypothesis and Savage's Sure-Thing Principle are violated in real life decisions. The popular explanation in terms of 'ambiguity aversion' is not completely accepted. On the…
In choice under risk, there is a standard notion of 'less risk-averse than', due to Yaari (1969). In the theory of comparative statics, the single-crossing property is satisfied by all weighted averages of a family of single-crossing…
Acyclicity of individual preferences is a minimal assumption in social choice theory. We replace that assumption by the direct assumption that preferences have maximal elements on a fixed agenda. We show that the core of a simple game is…
This paper studies how violations of structural assumptions like expected utility and exponential discounting can be connected to basic rationality violations, even though these assumptions are typically regarded as independent building…
We study the problem of option pricing and hedging strategies within the frame-work of risk-return arguments. An economic agent is described by a utility function that depends on profit (an expected value) and risk (a variance). In the…
Protecting against cyber-threats is vital for every organization and can be done by investing in cybersecurity controls and purchasing cyber insurance. However, these are interlinked since insurance premiums could be reduced by investing…
Coalition Logic is an important logic in logical studies of strategic reasoning, whose models are concurrent game models. In this paper, first, we systematically discuss three assumptions of concurrent game models and argue that they are…
An investor's risk aversion is assumed to tend to infinity. In a fairly general setting, we present conditions ensuring that the respective utility indifference prices of a given contingent claim converge to its super replication price.
We establish an equivalence between two seemingly different theories: one is the traditional axiomatisation of incomplete preferences on horse lotteries based on the mixture independence axiom; the other is the theory of desirable gambles…
The risk of a financial position is usually summarized by a risk measure. As this risk measure has to be estimated from historical data, it is important to be able to verify and compare competing estimation procedures. In statistical…
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…
We consider the problem of Adverse Selection and optimal derivative design within a Principal-Agent framework. The principal's income is exposed to non-hedgeable risk factors arising, for instance, from weather or climate phenomena. She…
An investor with constant relative risk aversion and an infinite planning horizon trades a risky and a safe asset with constant investment opportunities, in the presence of small transaction costs and a binding exogenous portfolio…
We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We…
This article presents methods for estimating extreme probabilities, beyond the range of the observations. These methods are model-free and applicable to almost any sample size. They are grounded in order statistics theory and have a wide…
We provide a formal framework accounting for a widespread idea in the theory of economic design: analytically established incompatibilities between given axioms should be qualified by the likelihood of their violation. We define the degree…
Reliability (survival analysis, to biostatisticians) is a key ingredient for mak- ing decisions that mitigate the risk of failure. The other key ingredient is utility. A decision theoretic framework harnesses the two, but to invoke this…