Who Should Exert More Effort? Risk Aversion, Downside Risk Aversion and Optimal Prevention

28 Pages Posted: 20 May 2019

Date Written: May 6, 2019

Abstract

I provide new results on how risk preferences affect optimal prevention. I identify a comparative risk aversion and a comparative downside risk aversion effect and emphasize those cases where both effects are aligned. Alignment depends on a probability threshold, which, in turn, only depends on the preferences of a benchmark agent. This allows to define an entire class of decision-makers who all share the same comparative static prediction relative to the reference agent. I interpret my results in terms of Arrow-Pratt risk aversion and the Schwarzian derivative, and also study several classes of parametric preferences changes.

Keywords: risk aversion, downside risk aversion, prevention, self-protection

JEL Classification: D61, D81

Suggested Citation

Peter, Richard, Who Should Exert More Effort? Risk Aversion, Downside Risk Aversion and Optimal Prevention (May 6, 2019). Available at SSRN: https://ssrn.com/abstract=3383853 or http://dx.doi.org/10.2139/ssrn.3383853

Richard Peter (Contact Author)

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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