Expected Utility and Catastrophic Risk

Tinbergen Institute Discussion Paper 14-133/III

18 Pages Posted: 7 Oct 2014

See all articles by Masako Ikefuji

Masako Ikefuji

University of Tsukuba

Roger J. A. Laeven

University of Amsterdam - Department of Quantitative Economics (KE)

J.R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics

Chris Muris

Simon Fraser University (SFU)

Date Written: October 6, 2014

Abstract

An expected utility based cost-benefit analysis is in general fragile to its distributional assumptions. We derive necessary and sufficient conditions on the utility function of the expected utility model to avoid this. The conditions ensure that expected (marginal) utility remains finite also under heavy-tailed distributional assumptions. Our results are context-free and are relevant to many fields encountering catastrophic risk analysis, such as, perhaps most noticeably, insurance and risk management.

Keywords: Expected utility, Catastrophe, Cost-benefit analysis, Risk management, Power utility, Exponential utility, Heavy tails

JEL Classification: D61, D81, G10, G20, Q5

Suggested Citation

Ikefuji, Masako and Laeven, Roger Jean Auguste and Magnus, Jan R. and Muris, Chris, Expected Utility and Catastrophic Risk (October 6, 2014). Tinbergen Institute Discussion Paper 14-133/III. Available at SSRN: https://ssrn.com/abstract=2506512 or http://dx.doi.org/10.2139/ssrn.2506512

Masako Ikefuji (Contact Author)

University of Tsukuba ( email )

Tsukuba University , Ibaraki Ken
Tsukuba, Ibaraki 305-8573, Ibaraki 3050006
Japan

Roger Jean Auguste Laeven

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Valckenierstraat 65-67
Amsterdam, 1018 XE
Netherlands
+31 20 525 4252 (Phone)

HOME PAGE: http://www.rogerlaeven.com

Jan R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Chris Muris

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
45
Abstract Views
470
PlumX Metrics