Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-10-14
Number: 14-133/III
Author-Name: Masako Ikefuji
Author-Workplace-Name: University of Southern Denmark, Denmark
Author-Name: Roger Laeven
Author-Workplace-Name: University of Amsterdam, the Netherlands
Author-Name: Jan Magnus
Author-Workplace-Name: VU University Amsterdam, the Netherlands
Author-Name: Chris Muris
Author-Workplace-Name: Simon Fraser University, Canada
Title: Expected Utility and Catastrophic Risk
Abstract: An expected utility based cost-benefit analysis is in general fragile to its distributional assumptions. We derive necessary and sufficient conditions on the utility function of the expected utility model to avoid this. The conditions ensure that expected (marginal) utility remains finite also under heavy-tailed distributional assumptions.
Our results are context-free and are relevant to many fields encountering catastrophic risk analysis, such as, perhaps most noticeably, insurance and risk management.
Classification-JEL: D61, D81, G10, G20, Q5
Keywords: Expected utility, Catastrophe, Cost-benefit analysis, Risk management, Power utility, Exponential utility, Heavy tails
File-Url: https://papers.tinbergen.nl/14133.pdf
File-Format: application/pdf
File-Size: 180056 bytes
Handle: RePEc:tin:wpaper:20140133