Choice under aggregate uncertainty

Nabil I. Al-Najjar*, Luciano Pomatto

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-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 languageEnglish (US)
Pages (from-to)187-209
Number of pages23
JournalTheory and Decision
Volume80
Issue number2
DOIs
StatePublished - 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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