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Preserving preference rankings under non-financial background risk

Y Malevergne and B Rey
The Journal of the Operational Research Society
Vol. 61, No. 8 (August 2010), pp. 1302-1308
Stable URL: http://www.jstor.org/stable/40802214
Page Count: 7
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Preserving preference rankings under non-financial background risk
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Abstract

We investigate the impact of a non-financial background risk ε̃ on the preference rankings between two independent financial risks z̃₁ and z̃₂ for an expected-utility maximizer. More precisely, we provide necessary and sufficient conditions for the alternative (xo + Z̃1, yo + ε̃) to be preferred to (x₀ + z̃₂, y₀+ ε̃) whenever (x₀ + z̃₁, is preferred to (x₀ + z̃₂,y₀) Utility functions that preserve the preference rankings are fully characterized. Their practical relevance is discussed in light of recent results on the constraints for the modelling of the preference for the disaggregation of harms.

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