First order versus second order risk aversion

Segal, Uzi; Spivak, Avia

doi:10.1016/0022-0531(90)90053-m

Cited by 337 publications

(204 citation statements)

References 11 publications

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“…Additionally, since Guo's model presents some similarities (but also differences) with the FORA case developed by Segal and Spivak (1990), we also extend a result derived by Segal and Spivak (1990) for binary risks to any distribution of losses.…”

Section: Introductionmentioning

confidence: 61%

“…By similar arguments, Segal and Spivak (1990) have argued (and have proved for binary risks) that people may buy full insurance under FORA even though they have to pay some marginal loading. This behavior will be studied in detail in Sections 3 and 4, where we will extend Segal's and Spivak's result to a general loss distribution using Guo's model and distinguishing the case of proportional insurance from that of deductible insurance.…”

Section: First-order Risk Aversion Loss Aversion and Local Risk Attmentioning

confidence: 89%

“…which is a special case of Segal and Spivak's (1990) result 5 at points where the utility function is not differentiable. This shows that, in the reference-dependent utility model of Guo et al (2016), the risk premium π v (r, t) for small risks is proportional to t rather than t 2 , i.e., loss aversion induces FORA at r. The second term π v,2 (r, t) shows the effect of curvature of the utility function v in Guo's model in Equation (3) and is analogous to the classical Arrow-Pratt risk premium associated to the basic utility u:…”

Section: First-order Risk Aversion Loss Aversion and Local Risk Attmentioning

confidence: 98%

“…As Segal and Spivak (1990) have pointed out, for small risks, a DM is almost risk-neutral under SORA (i.e., for λ = 1 in Guo's model) because a differentiable utility function is almost linear in a neighborhood of r. As the Arrow-Pratt risk premium expressed by Equation (6) under SORA is proportional to t 2 , the DM evaluates small risks essentially by their expected value and is always willing to take up very small gambles that are in his/her favor.…”

Section: First-order Risk Aversion Loss Aversion and Local Risk Attmentioning

confidence: 99%

“…An exception to Borch's assumptions resulted from the distinction made by Segal and Spivak (1990) between second-order and first-order risk aversion (respectively, SORA and FORA). While under SORA (as for Borch) the utility function of final wealth is always differentiable, it exhibits (at least) one point of non-differentiability under FORA, and this assumption has important consequences for the insured's optimal behavior.…”

Section: Introductionmentioning

confidence: 98%

See 4 more Smart Citations

Risk Aversion, Loss Aversion, and the Demand for Insurance

Eeckhoudt

Fiori

Gianin

2018

Risks

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Abstract:In this paper we analyze insurance demand when the utility function depends both upon final wealth and the level of losses or gains relative to a reference point. Besides some comparative statics results, we discuss the links with first-order risk aversion, with the Omega measure, and with a tendency to over-insure modest risks that has been been extensively documented in real insurance markets.

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Section: Introductionmentioning

confidence: 61%

Section: First-order Risk Aversion Loss Aversion and Local Risk Attmentioning

confidence: 89%

Section: First-order Risk Aversion Loss Aversion and Local Risk Attmentioning

confidence: 98%

Section: First-order Risk Aversion Loss Aversion and Local Risk Attmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 98%

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Risk Aversion, Loss Aversion, and the Demand for Insurance

Eeckhoudt

Fiori

Gianin

2018

Risks

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New activities, the welfare cost of uncertainty and investment policies

Aizenman

1998

Int. J. Fin. Econ.

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This paper studies the effect of policy uncertainty on the formation of new activities in Romer's (1994) type of economy, where productivity of labor increases with the number of capital goods. Adding a new capital good requires a capital specific set‐up cost, invested prior to using the capital good. Agents are disappointment averse, putting greater utility weight on downside risk (as modeled by Gul, 1991). Policy uncertainty is induced by ‘revenue seeking’ administrations, which tend to tax the ‘quasi fixed’ capital, ignoring long term costs. Disappointment aversion implies that investment, labor and capitalists income drop at a rate proportional to the standard deviation of the tax rate. Hence, policy uncertainty induces first‐order adverse effects, whereas policy uncertainty leads to second‐order effects when consumers maximize the conventional expected utility. The adverse effects of policy uncertainty can be partially overcome by a proper investment policy. The paper interprets the tax concessions granted to multinationals as a commitment device that helps overcoming the adverse implications of policy uncertainty. © 1998 John Wiley & Sons, Ltd.

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Individual Investor Portfolios

Polkovnichenko¹

2010

Behavioral Finance

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First order versus second order risk aversion

Cited by 337 publications

References 11 publications

Risk Aversion, Loss Aversion, and the Demand for Insurance

Risk Aversion, Loss Aversion, and the Demand for Insurance

New activities, the welfare cost of uncertainty and investment policies

Individual Investor Portfolios

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