The Increasing Convex Order and the Trade–off of Size for Risk. Issue 3 (11th December 2015)

• Record Type: Journal Article
• Authors: Liu, Liqun; Meyer, Jack
• Is Part Of: Journal of risk and insurance. Volume 84:Issue 3(2017)
• Page Start: 881
• Page End: 897
• Publication Date: 2015-12-11
• Subjects: Insurance -- United States -- Periodicals; 368.97305
• DOI: 10.1111/jori.12132
• Languages: English
• ISSNs: 0022-4367

Abstract

ABSTRACT: One random variable is larger than another in the increasing convex order if that random variable is preferred or indifferent to the other by all decision makers with increasing and convex utility functions. Decision makers in this set prefer larger random variables and are risk loving. When a decision maker whose utility function is increasing and concave is indifferent between such a pair of random variables, a trade‐off of size for risk is revealed, and this information can be used to make comparative static predictions concerning the choices of other decision makers. Specifically, the choices of all those who are strongly more (or less) risk averse than the reference decision maker can be predicted. Thus, the increasing convex order, together with Ross's (1981) definition of strongly more risk averse, can provide additional comparative static findings in a variety of decision problems. The analysis here discusses the decisions to self‐protect and to purchase insurance.