The two-moment decision model with additive risks

Xu Guo; Andreas Wagener; Wing Keung Wong; Lixing Zhu

doi:10.1057/s41283-017-0028-6

The two-moment decision model with additive risks

Xu Guo, Andreas Wagener, Wing Keung Wong^*, Lixing Zhu

^*Corresponding author for this work

Department of Mathematics

Research output: Contribution to journal › Journal article › peer-review

27 Citations (Scopus)

Abstract

With multiple additive risks, the mean-variance approach and the expected utility approach of risk preferences are compatible if all attainable distributions belong to the same location-scale family. Under this proviso, we survey existing results on the parallels of the two approaches with respect to risk attitudes, the changes thereof, and the comparative statics for simple, linear choice problems under risks. In mean-variance approach all effects can be couched in terms of the marginal rate of substitution between mean and variance. We provide some simple proofs of some previous results. We apply the theory we stated or developed in our paper to study the behavior of banking firm and study risk-taking behavior with background risk in the mean-variance model.

Original language	English
Pages (from-to)	77-94
Number of pages	18
Journal	Risk Management
Volume	20
Issue number	1
Early online date	31 Oct 2017
DOIs	https://doi.org/10.1057/s41283-017-0028-6
Publication status	Published - Feb 2018

Scopus Subject Areas

Business and International Management
Finance
Economics and Econometrics
Strategy and Management

User-Defined Keywords

Background risk
Expected utility approach
Location-scale family
Mean-variance model
Multiple additive risks

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10.1057/s41283-017-0028-6

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title = "The two-moment decision model with additive risks",

abstract = "With multiple additive risks, the mean-variance approach and the expected utility approach of risk preferences are compatible if all attainable distributions belong to the same location-scale family. Under this proviso, we survey existing results on the parallels of the two approaches with respect to risk attitudes, the changes thereof, and the comparative statics for simple, linear choice problems under risks. In mean-variance approach all effects can be couched in terms of the marginal rate of substitution between mean and variance. We provide some simple proofs of some previous results. We apply the theory we stated or developed in our paper to study the behavior of banking firm and study risk-taking behavior with background risk in the mean-variance model.",

keywords = "Background risk, Expected utility approach, Location-scale family, Mean-variance model, Multiple additive risks",

author = "Xu Guo and Andreas Wagener and Wong, {Wing Keung} and Lixing Zhu",

note = "Acknowledgements: The authors are grateful to Professor Ira Horowitz for his valuable comments that have significantly improved this manuscript. The third author would like to thank Professors Robert B. Miller and Howard E. Thompson for their continuous guidance and encouragement. The authors are grateful to the Editor and two anonymous referees for constructive comments and suggestions that led to a significant improvement of an early manuscript. This research has been partially supported by the Fundamental Research Funds for the Central Universities, grants from the National Natural Science Foundation of China (11626130, 11601227, 11671042), Natural Science Foundation of Jiangsu Province, China (BK20150732), Asia University, Hang Seng Management College, Lingnan University, Shanghai University of International Business and Economics, Hong Kong Baptist University, the Research Grants Council (RGC) of Hong Kong (project numbers 12502814 and 12500915), and Ministry of Science and Technology (MOST), R.O.C.",

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The two-moment decision model with additive risks

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