The two-moment decision model with additive risks

Xu GUO, Andreas WAGENER, Wing Keung WONG, Lixing ZHU

Research output: Journal PublicationsJournal Article (refereed)peer-review

15 Citations (Scopus)

Abstract

With multiple additive risks, the mean-variance approach and the expected utility approach of risk preferences are compatible if all attainable distributions belong to the same location-scale family. Under this proviso, we survey existing results on the parallels of the two approaches with respect to risk attitudes, the changes thereof, and the comparative statics for simple, linear choice problems under risks. In mean-variance approach all effects can be couched in terms of the marginal rate of substitution between mean and variance. We provide some simple proofs of some previous results. We apply the theory we stated or developed in our paper to study the behavior of banking firm and study risk-taking behavior with background risk in the mean-variance model.
Original languageEnglish
Pages (from-to)77-94
Number of pages18
JournalRisk Management
Volume20
Issue number1
DOIs
Publication statusPublished - 1 Feb 2018
Externally publishedYes

Keywords

  • Background risk
  • Expected utility approach
  • Location-scale family
  • Mean-variance model
  • Multiple additive risks

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