Abstract
This paper provides a general choice-theoretic characterization of the trade-off between risk and skewness, whose importance in understanding risk-taking behavior is well documented in empirical studies. The condition under which the prudence measure (Kimball 1990) characterizes the strength of an individual's downside-risk aversion against his own risk aversion is identified and interpreted in a unifying framework based on the concept of one stochastic dominant change preceding another and that of the desirability of a stochastic change. The framework is also shown to be useful for a better understanding of the Arrow-Pratt measure, the stronger Ross measure, and the coincidence of the characterizations of downside-risk aversion and prudence, as well as the relationship between stochastic dominances of different degrees. © 2005 INFORMS.
Original language | English |
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Pages (from-to) | 1816-1828 |
Number of pages | 12 |
Journal | MANAGEMENT SCIENCE |
Volume | 51 |
Issue number | 12 |
DOIs | |
Publication status | Published - Dec 2005 |
Keywords
- Arrow-Pratt measure
- Downside risk
- Prudence measure
- Risk aversion
- Skewness preference