Since Fishburn and Porter (1976), it has been known that a first-order dominant shift in the distribution of random returns of an asset does not necessarily induce a risk-averse decision maker to increase his holdings of that improved asset. To obtain the desired comparative statics result, one...

In this paper we address the problem of determining whether adding independent risks or subdividing them is a good substitute for insurance. Despite the fact that accepting more i.i.d. risks increases total risk, it is shown that some risk-averse decision makers can rationally reduce their...

Holding more of the riskless asset and insuring the risky asset are two ways to reduce portfolio risk. These methods can be employed jointly. As a result, the amount of insurance selected to indemnify against possible losses from holding a risky asset depends, in general, on the quantities of...

Models of the insurance markets and institutions are routinely based on expected utility. Since EU is being challenged by an increasing number of decision models, we examine whether EU-based models are robust in their predictions. To do so, we rework some basic models of optimal insurance...

In this article, we generalize the Hoy and Robson (1981) analysis and provide a necessary and sufficient condition for insurance not to be a Giffen good. The condition gives a bound for the variation of absolute risk aversion that permits the wealth effect to be always dominated by the...

We analyze the optimal choices of agents with utility functions whose derivatives alternate in sign, an important class that includes most of the functions commonly used in economics and finance (Mixed Risk Aversion, MRA, Caballé and Pomansky, 1996). We propose a comparative mixed risk aversion...

The economic theory of decision making under risk has seen remarkable advances over the 50 years since Pratt’s (1964) characterization of risk aversion under expected utility. We review developments in three key areas to which Louis Eeckhoudt has made significant contributions: (1) increases...

We show in this article that bang-bang portfolio strategies where the investor is alternatively 100% in equity and 100% in cash are dynamically inefficient. Our proof of this is based on a simple second-order stochastic dominance (SSD) argument. It implies that this is true for any decision...

The Precautionary Principle has provided the foundations for building a new risk regulatory pattern under scientific uncertainty. This paper investigates how classical economic theory may, or may not, justify the Precautionary Principle. It examines the link between irreversibility, the prospect...