Greater Mutual Aggravation

D. Nocetti, H. Schlesinger, Sebastian Ebert

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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

Keywords

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

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    Nocetti, D., Schlesinger, H., & Ebert, S. (2016). Greater Mutual Aggravation. (Netspar Academic Paper; Vol. DP 01/2016-002). NETSPAR. https://www.netspar.nl/assets/uploads/002_Ebert.pdf