Local Utility and Multivariate Risk Aversion
23 Pages Posted: 10 Jan 2012 Last revised: 17 Jan 2015
Date Written: January 10, 2012
We revisit Machina's local utility as a tool to analyze attitudes to multivariate risks. Using martingale embedding techniques, we show that for non-expected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is equivalent to the concavity of the local utility functions, thereby generalizing Machina's result in Machina (1982). To analyze comparative risk attitudes within the multivariate extension of rank dependent expected utility of Galichon and Henry (2011), we extend Quiggin's monotone mean and utility preserving increases in risk and show that the useful characterization given in Landsberger and Meilijson (1994) still holds in the multivariate case.
Keywords: local utility, multivariate risk aversion, multivariate rank dependent utility, pessimism, multivariate Bickel-Lehmann dispersion
JEL Classification: D63, D81, C61
Suggested Citation: Suggested Citation