Choice under aggregate uncertainty

Nabil I. Al-Najjar; Luciano Pomatto

doi:10.1007/s11238-015-9504-1

Choice under aggregate uncertainty

Nabil I. Al-Najjar^*, Luciano Pomatto

^*Corresponding author for this work

Managerial Economics, Decision Sciences and Operations

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

Abstract

We provide a simple model to measure the impact of aggregate risks. We consider agents whose rankings of lotteries over vectors of outcomes satisfy expected utility and separability. Such rankings are characterized in terms of aggregative utilities that measure sensitivity to aggregate uncertainty in a straightforward way. We consider applications to models of product variety, portfolio choice, and public attitudes towards catastrophic risks. The framework lends support to precautionary measures that penalize policies for exposure to correlation. The model rationalizes a number of behavioral and policy patterns as attempts to hedge against aggregate uncertainty.

Original language	English (US)
Pages (from-to)	187-209
Number of pages	23
Journal	Theory and Decision
Volume	80
Issue number	2
DOIs	https://doi.org/10.1007/s11238-015-9504-1
State	Published - Feb 1 2016

Keywords

Aggregate risks
Risk and uncertainty

ASJC Scopus subject areas

Decision Sciences(all)
Developmental and Educational Psychology
Arts and Humanities (miscellaneous)
Applied Psychology
Social Sciences(all)
Economics, Econometrics and Finance(all)
Computer Science Applications

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10.1007/s11238-015-9504-1

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AB - We provide a simple model to measure the impact of aggregate risks. We consider agents whose rankings of lotteries over vectors of outcomes satisfy expected utility and separability. Such rankings are characterized in terms of aggregative utilities that measure sensitivity to aggregate uncertainty in a straightforward way. We consider applications to models of product variety, portfolio choice, and public attitudes towards catastrophic risks. The framework lends support to precautionary measures that penalize policies for exposure to correlation. The model rationalizes a number of behavioral and policy patterns as attempts to hedge against aggregate uncertainty.

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Choice under aggregate uncertainty

Abstract

Keywords

ASJC Scopus subject areas

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