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Caltech

Ulric B. and Evelyn L. Bray Social Sciences Seminar

Wednesday, May 15, 2024
4:00pm to 5:00pm
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Baxter B125
Risk Aversion and Insurance Propensity
Fabio Maccheroni, Full Professor, Department of Decision Sciences, Università Bocconi,

Abstract: We provide a new foundation of risk aversion by showing that the propension to exploit insurance opportunities fully describes this attitude. Our foundation, which applies to any probabilistically sophisticated preference, well accords with the commonly held prudential interpretation of risk aversion that dates back to the seminal works of Arrow (1963) and Pratt (1964). In our main results, we first characterize the Arrow-Pratt risk aversion in terms of propension to full insurance and the stronger notion of risk aversion of Rothschild and Stiglitz (1970) in terms of propension to partial insurance. We then extend the analysis to comparative risk aversion by showing that the notion of Yaari (1969) corresponds to comparative propension to full insurance, while the stronger notion of Ross (1981) corresponds to comparative propension to partial insurance.

For more information, please contact Barbara Estrada by phone at 626-395-4083 or by email at [email protected].