Local Utility and Risk Aversion

Alfred Galichon , Arthur Charpentier (1) , Marc Henry (2, 3)

1 UR - Université de Rennes
2 CIRANO - Centre interuniversitaire de recherche en analyse des organisations
3 CIREQ - Centre interuniversitaire de recherche en économie quantitative

We revisit Machina's local utility as a tool to analyze attitudes to multivariate risks. Using martingale embedding techniques, we show that for non-expected utility maximizers choosing between multivariate prospects, aversion to multivariate mean preserving increases in risk is equivalent to the concavity of the local utility functions, thereby generalizing Machina's result in Machina (1982). To analyze comparative risk attitudes within the multivariate extension of rank dependent expected utility of Galichon and Henry (2011), we extend Quiggin's monotone mean and utility preserving increases in risk and show that the useful characterization given in Landsberger and Meilijson (1994) still holds in the multivariate case.

Keywords: Local utility; Multivariate risk aversion; Pessimism; Multivariate rand dependent utility; Multivariate Bickel-Lehmann dispersion

Domains: Economics and Finance

Alfred Galichon, Arthur Charpentier, Marc Henry. Local Utility and Risk Aversion. Mathematics of Operations Research, 2012, Forthcoming. ⟨hal-03569250⟩