This paper analyzes optimal hedging of a tradable risk (e.g. price risk or exchange rate risk) with forward contracts in the presence of untradable inflation risk. Utility is defined over real wealth. Optimal forward positions are derived relative to a given initial exposure in the tradable...

We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is...

Consider a finite data set where each observation consists of a bundle of contingent consumption chosen by an agent from a constraint set of such bundles. We develop a general procedure for testing the consistency of this data set with a broad class of models of choice under risk and under...

This paper analyzes optimal hedging of a tradable risk (e.g. price risk or exchange rate risk) with forward contracts in the presence of untradable inflation risk. Utility is defined over real wealth. Optimal forward positions are derived relative to a given initial exposure in the tradable...

Given the possibility to modify the probability of a loss, will a profit-maximizing insurer engage in loss prevention or is it in his interest to increase the loss probability? This paper investigates this question. First, we calculate the expected profit maximizing loss probability within an...

Building on the isomorphism between the theories of risk aversion and precautionary saving, an objective index of prudent behavior is introduced, which generalizes the riskiness index set forth by Aumann and Serrano (2008). A benchmark framework for the monotone relation between risk aversion...

This paper studies the relation between concavity, stochastic or state dependent utility functions, and risk aversion. Using the common definition of risk aversion, but modified for state dependent preferences, we show that concavity does not imply risk aversion. Instead, it implies a weaker...

Given the possibility to modify the probability of a loss, will a profit-maximizing insurer engage in loss prevention or is it in his interest to increase the loss probability? This paper investigates this question. First, we calculate the expected profit maximizing loss probability within an...

We investigate the origin of stochastic choice and differentiate between three classes of models that account for it: Random Utility, Bounded Rationality, and Deliberate Randomization. We conduct an experiment in which subjects face the same questions repeated multiple times, but we consider...

Although there are alternative models which can explain the Allais paradox with non-standard preferences, they do not take the emerging evidence on preference imprecision into account. The imprecision is so far incorporated into these models by adding a stochastic specification implying the...