On the Strictly Decreasing Utility (Value) Premium of Friedman-Savage

14 Pages Posted: 6 Jun 2014

See all articles by Jingyuan Li

Jingyuan Li

Lingnan University - Department of Finance and Insurance

Jianli Wang

Nanjing University of Aeronautics and Astronautics - College of Economics and Management

Date Written: June 6, 2014

Abstract

This paper re-investigates the utility premium of Friedman-Savage (1948). We show that monotone comparative statics predictions under changes in risk are assured by strictly decreasing utility premium alone. Applications to the demand for precautionary saving, the precautionary effort and the optimal portfolio problem are discussed. We also extend the results to non-expected-utility framework and show that the major precautionary saving results in expected-utility setting can be extended to the case of Selden/Kreps-Porteus preferences.

Keywords: Utility premium; Value premium; Comparative statics; Changes in risk; Precautionary saving

JEL Classification: D81

Suggested Citation

Li, Jingyuan and Wang, Jianli, On the Strictly Decreasing Utility (Value) Premium of Friedman-Savage (June 6, 2014). Available at SSRN: https://ssrn.com/abstract=2446779 or http://dx.doi.org/10.2139/ssrn.2446779

Jingyuan Li (Contact Author)

Lingnan University - Department of Finance and Insurance ( email )

Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China

Jianli Wang

Nanjing University of Aeronautics and Astronautics - College of Economics and Management ( email )

Nanjing
China

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