The safety first expected utility model: Experimental evidence and economic implications
2009; Elsevier BV; Volume: 33; Issue: 8 Linguagem: Inglês
10.1016/j.jbankfin.2009.02.014
ISSN1872-6372
Autores Tópico(s)Financial Markets and Investment Strategies
ResumoRoy's [Roy, A., 1952. Safety first and the holding of assets. Econometrica 20 (3), 431–449] safety first criterion advocates the minimization of the probability of outcomes below a certain "disaster" level. This paper examines safety first theoretically and experimentally. We find that safety first plays a crucial role in decision-making, inducing choices that cannot be explained by, and even contradict, risk-aversion, Prospect Theory, and loss-aversion in general. Yet, safety first alone cannot explain individual choice. Therefore, we propose an expected utility – safety first (EU–SF) model where decisions are made based on a weighted average of the safety first criterion and standard expected utility maximization. We experimentally estimate these relative weights, and discuss their economic implications.
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