Comparative Risk Apportionment

Authors: Liqun Liu, Paan Jindapon, and William S. Neilson Date: January 2021

Working paper 2101

A decision maker who would rather apportion an independent risk in a state with a good lottery than in a state with a bad lottery is said to have a preference for risk apportionment (Eeckhoudt & Schlesinger, 2006). In this paper, Liqun Liu and coauthors Paan Jindapon and William S. Neilson propose a measure for the strength of nth-degree risk apportionment preference based on Pratt’s probability premium (Pratt, 1964). Under expected utility theory, the authors analyze the relationship between a greater preference for risk apportionment and both the Ross and Arrow-Pratt versions of comparative risk aversion. 

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Keywords: Risk apportionment, risk aversion, downside risk aversion, prudence