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A Good Sign for Multivariate Risk Taking

26 Pages Posted: 5 Oct 2006  

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM)

Béatrice Rey

University of Lyon 1 - ISFA Graduate School of Actuarial Science

Harris Schlesinger

University of Alabama; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2006

Abstract

Decisions under risk are often multidimensional, where the preferences of the decision maker depend on several attributes. For example, an individual might be concerned about both her level of wealth and the condition of her health. Many times the signs of successive cross derivatives of a utility function play an important role in these models. However, there has not been a simple and intuitive interpretation for the meaning of such derivatives. The purpose of this paper is to give such an interpretation. In particular, we provide an equivalence between the signs of these cross derivatives and individual preference within a particular class of simple lotteries.

Keywords: correlation aversion, multivariate risk, prudence, risk aversion, temperance

JEL Classification: D81

Suggested Citation

Eeckhoudt, Louis and Rey, Béatrice and Schlesinger, Harris, A Good Sign for Multivariate Risk Taking (September 2006). CESifo Working Paper Series No. 1796. Available at SSRN: https://ssrn.com/abstract=935012

Louis Eeckhoudt

Facultes Universitaires Catholiques de Mons (FUCAM) ( email )

Chaussee de Binche, 151
Mons 7000
Belgium

Beatrice Rey

University of Lyon 1 - ISFA Graduate School of Actuarial Science ( email )

50, Avenue Tony Garnier
Lyon Cedex 07, 69366
France

Harris Schlesinger (Contact Author)

University of Alabama ( email )

P.O. Box 870244
200 Alston Hall, Box 870224
Tuscaloosa, AL 35487
United States
205-348-7858 (Phone)
205-348-0590 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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