Journal article
Changes in Risky Benefits and in Risky Costs: A Question of the Right Order
Management science, Vol.68(5), pp.3625-3634
05/01/2022
DOI: 10.1287/mnsc.2021.4081
Abstract
We organize and extend findings on the comparative static effects of risk changes on optimal behavior in a unifying expected utility model. We determine restrictions on preferences for clear-cut results. Risk increases of a benefit are compensated by lowering exposure to risk. For risk increases of a cost, the response depends on the order of the risk change. This discrepancy arises because even-order risk increases of a cost raise the riskiness of the payoff distribution, whereas odd-order risk increases of a cost reduce it. We identify the stochastic dominance orders to resolve this discrepancy and discuss specific decision problems as applications.
This paper was accepted by Manel Baucells, behavioral economics and decision analysis.
Details
- Title: Subtitle
- Changes in Risky Benefits and in Risky Costs: A Question of the Right Order
- Creators
- Mario Menegatti - University of ParmaRichard Peter - University of Iowa
- Resource Type
- Journal article
- Publication Details
- Management science, Vol.68(5), pp.3625-3634
- DOI
- 10.1287/mnsc.2021.4081
- ISSN
- 0025-1909
- eISSN
- 1526-5501
- Language
- English
- Date published
- 05/01/2022
- Academic Unit
- Finance
- Record Identifier
- 9984380532102771
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