The Increasing Convex Order and the Trade–Off of Size for Risk

17 Pages Posted: 15 Aug 2017

See all articles by Liqun Liu

Liqun Liu

Texas A&M University - Private Enterprise Research Center

Jack Meyer

Michigan State University

Date Written: September 2017

Abstract

One random variable is larger than another in the increasing convex order if that random variable is preferred or indifferent to the other by all decision makers with increasing and convex utility functions. Decision makers in this set prefer larger random variables and are risk loving. When a decision maker whose utility function is increasing and concave is indifferent between such a pair of random variables, a trade‐off of size for risk is revealed, and this information can be used to make comparative static predictions concerning the choices of other decision makers. Specifically, the choices of all those who are strongly more (or less) risk averse than the reference decision maker can be predicted. Thus, the increasing convex order, together with Ross's (1981) definition of strongly more risk averse, can provide additional comparative static findings in a variety of decision problems. The analysis here discusses the decisions to self‐protect and to purchase insurance.

Suggested Citation

Liu, Liqun and Meyer, Jack, The Increasing Convex Order and the Trade–Off of Size for Risk (September 2017). Journal of Risk and Insurance, Vol. 84, Issue 3, pp. 881-897, 2017, Available at SSRN: https://ssrn.com/abstract=3018867 or http://dx.doi.org/10.1111/jori.12132

Liqun Liu (Contact Author)

Texas A&M University - Private Enterprise Research Center ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

Jack Meyer

Michigan State University ( email )

201 Marshall Hall
East Lansing, MI 48824
United States
517-355-7749 (Phone)

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