Risk Preferences and their Robust Representation

49 Pages Posted: 23 Feb 2010 Last revised: 26 Dec 2010

Michael Kupper

Vienna Institute of Finance

Samuel Drapeau

CAFR

Date Written: February 22, 2010

Abstract

To address the plurality of interpretations of the subjective notion of risk, we describe it by means of a risk order and concentrate on the context invariant features of diversification and monotonicity. Our main results are uniquely characterized robust representations of lower semicontinuous risk orders on vector spaces and convex sets. This representation covers most instruments related to risk and allow for a differentiated interpretation depending on the underlying context which is illustrated in different settings: For random variables, risk perception can be interpreted as model risk, and we compute among others the robust representation of the economic index of riskiness. For lotteries, risk perception can be viewed as distributional risk and we study the "Value at Risk''. For consumption patterns, which excerpt an intertemporality dimension in risk perception, we provide an interpretation in terms of discounting risk and discuss some examples.

Keywords: Risk Preferences, Risk Measures, Robust Representation

JEL Classification: D81, G28, C5, C6

Suggested Citation

Kupper, Michael and Drapeau, Samuel, Risk Preferences and their Robust Representation (February 22, 2010). Available at SSRN: https://ssrn.com/abstract=1557083 or http://dx.doi.org/10.2139/ssrn.1557083

Michael Kupper

Vienna Institute of Finance ( email )

Nordbergstrasse 15
Vienna, 1090
Austria

Samuel Drapeau (Contact Author)

CAFR ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

HOME PAGE: http://www.samuel-drapeau.info

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