Greater Mutual Aggravation

D. Nocetti, H. Schlesinger, Sebastian Ebert

Research output: Working paperDiscussion paperOther research output

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Abstract

A large strand of research has identified conditions on preferences under which (i) a single risk is undesirable and (ii) two independent risks aggravate each other. We extend this line of inquiry by establishing conditions such that (iii) the degree of mutual aggravation is greater for more severe risks. Here, the severity of risks is characterized by means of general stochastic dominance shifts and also via moment-preserving stochastic transformations. Greater mutual aggravation is implied by all commonly used utility functions and may thus be regarded a typical property of expected utility preferences. We show that greater mutual aggravation determines the comparative statics of risk changes in several risk management problems, including precautionary saving, intertemporal
risk-taking, and self-protection. Greater mutual aggravation further explains recent experimental findings on higher-order risk preferences. Finally, it offers a new, simple, and efficient method to elicit risk preferences up to “very” high orders.
Original languageEnglish
Place of PublicationTilburg
PublisherNETSPAR
Number of pages26
Publication statusPublished - Jan 2016

Publication series

NameNetspar Academic Paper
VolumeDP 01/2016-002

Fingerprint

Risk preferences
Expected utility
Utility preference
Risk management
Utility function
Self-protection
Comparative statics
Precautionary saving
Severity
Stochastic dominance

Keywords

  • mixed risk aversion
  • mutual aggravation
  • risk apportionment
  • stochastic dominance
  • utility premium
  • prudence

Cite this

Nocetti, D., Schlesinger, H., & Ebert, S. (2016). Greater Mutual Aggravation. (Netspar Academic Paper; Vol. DP 01/2016-002). Tilburg: NETSPAR.
Nocetti, D. ; Schlesinger, H. ; Ebert, Sebastian. / Greater Mutual Aggravation. Tilburg : NETSPAR, 2016. (Netspar Academic Paper).
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Nocetti, D, Schlesinger, H & Ebert, S 2016 'Greater Mutual Aggravation' Netspar Academic Paper, vol. DP 01/2016-002, NETSPAR, Tilburg.

Greater Mutual Aggravation. / Nocetti, D.; Schlesinger, H.; Ebert, Sebastian.

Tilburg : NETSPAR, 2016. (Netspar Academic Paper; Vol. DP 01/2016-002).

Research output: Working paperDiscussion paperOther research output

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AB - A large strand of research has identified conditions on preferences under which (i) a single risk is undesirable and (ii) two independent risks aggravate each other. We extend this line of inquiry by establishing conditions such that (iii) the degree of mutual aggravation is greater for more severe risks. Here, the severity of risks is characterized by means of general stochastic dominance shifts and also via moment-preserving stochastic transformations. Greater mutual aggravation is implied by all commonly used utility functions and may thus be regarded a typical property of expected utility preferences. We show that greater mutual aggravation determines the comparative statics of risk changes in several risk management problems, including precautionary saving, intertemporalrisk-taking, and self-protection. Greater mutual aggravation further explains recent experimental findings on higher-order risk preferences. Finally, it offers a new, simple, and efficient method to elicit risk preferences up to “very” high orders.

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Nocetti D, Schlesinger H, Ebert S. Greater Mutual Aggravation. Tilburg: NETSPAR. 2016 Jan. (Netspar Academic Paper).