We organize and extendfindings on the comparative static effects of riskchanges on optimal behavior in a unifying expected utility model. We determine restric-tions on preferences for clear-cut results. Risk increases of a benefit are compensated bylowering exposure to risk. For risk increases of a cost, the response depends on the order ofthe risk change. This discrepancy arises because even-order risk increases of a cost raise theriskiness 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 specif-ic decision problems as applications.

Changes in Risky Benefits and in Risky Costs: A Question of the Right Order / Menegatti, Mario; Peter, Richard. - In: MANAGEMENT SCIENCE. - ISSN 1526-5501. - (2021). [10.1287/mnsc.2021.4081]

Changes in Risky Benefits and in Risky Costs: A Question of the Right Order

mario menegatti;
2021-01-01

Abstract

We organize and extendfindings on the comparative static effects of riskchanges on optimal behavior in a unifying expected utility model. We determine restric-tions on preferences for clear-cut results. Risk increases of a benefit are compensated bylowering exposure to risk. For risk increases of a cost, the response depends on the order ofthe risk change. This discrepancy arises because even-order risk increases of a cost raise theriskiness 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 specif-ic decision problems as applications.
Changes in Risky Benefits and in Risky Costs: A Question of the Right Order / Menegatti, Mario; Peter, Richard. - In: MANAGEMENT SCIENCE. - ISSN 1526-5501. - (2021). [10.1287/mnsc.2021.4081]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11381/2920871
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