TY - JOUR
T1 - First order versus second order risk aversion
AU - Segal, Uzi
AU - Spivak, Avia
N1 - Funding Information:
* We are grateful to Chew Soo Hong, Larry Epstein, Giora Hanoch, Edi Karni, Joe Ostroy, Bob Rosenthal, and especially Zvi Safra, Mark Machina, and an anonymous referee for their helpful comments. Financial support by SSHRC Grant 410-87-1375 is gratefully acknowledged.
PY - 1990/6
Y1 - 1990/6
N2 - This paper defines a new concept of attitude towards risk. For an actuarially fair random variable ε{lunate}, π(t) is the risk premium the decisionmaker is willing to pay to avoid tε{lunate}. In expected utility, and as it turns out, in the case of smooth Freéchet differentiability of the representation functional, π′(0) = 0. There are models (e.g., rank dependent probabilities) in which ∂π ∂t|t=0+ ≠ 0. We call the latter attitude as being of order 1, and we call the first one attitude of order 2. These concepts are then applied to analyze the problem of full insurance.
AB - This paper defines a new concept of attitude towards risk. For an actuarially fair random variable ε{lunate}, π(t) is the risk premium the decisionmaker is willing to pay to avoid tε{lunate}. In expected utility, and as it turns out, in the case of smooth Freéchet differentiability of the representation functional, π′(0) = 0. There are models (e.g., rank dependent probabilities) in which ∂π ∂t|t=0+ ≠ 0. We call the latter attitude as being of order 1, and we call the first one attitude of order 2. These concepts are then applied to analyze the problem of full insurance.
UR - http://www.scopus.com/inward/record.url?scp=0000092680&partnerID=8YFLogxK
U2 - 10.1016/0022-0531(90)90053-M
DO - 10.1016/0022-0531(90)90053-M
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AN - SCOPUS:0000092680
VL - 51
SP - 111
EP - 125
JO - Journal of Economic Theory
JF - Journal of Economic Theory
SN - 0022-0531
IS - 1
ER -