TY - JOUR
T1 - Concave/convex weighting and utility functions for risk
T2 - A new light on classical theorems
AU - Wakker, Peter P.
AU - Yang, Jingni
N1 - Publisher Copyright:
© 2021 The Author(s)
PY - 2021/9
Y1 - 2021/9
N2 - This paper analyzes concave and convex utility and probability distortion functions for decision under risk (law-invariant functionals). We characterize concave utility for virtually all existing models, and concave/convex probability distortion functions for rank-dependent utility and prospect theory in complete generality, through an appealing and well-known condition (convexity of preference, i.e., quasiconcavity of the functional). Unlike preceding results, we do not need to presuppose any continuity, let be differentiability. An example of a new light shed on classical results: whereas, in general, convexity/concavity with respect to probability mixing is mathematically distinct from convexity/concavity with respect to outcome mixing, in Yaari's dual theory (i.e., Wang's premium principle) these conditions are not only dual, as was well-known, but also logically equivalent, which had not been known before.
AB - This paper analyzes concave and convex utility and probability distortion functions for decision under risk (law-invariant functionals). We characterize concave utility for virtually all existing models, and concave/convex probability distortion functions for rank-dependent utility and prospect theory in complete generality, through an appealing and well-known condition (convexity of preference, i.e., quasiconcavity of the functional). Unlike preceding results, we do not need to presuppose any continuity, let be differentiability. An example of a new light shed on classical results: whereas, in general, convexity/concavity with respect to probability mixing is mathematically distinct from convexity/concavity with respect to outcome mixing, in Yaari's dual theory (i.e., Wang's premium principle) these conditions are not only dual, as was well-known, but also logically equivalent, which had not been known before.
KW - Convex preferences
KW - Quasiconcave utility
KW - Rank-dependent utility
KW - Risk aversion
UR - http://www.scopus.com/inward/record.url?scp=85111920844&partnerID=8YFLogxK
U2 - 10.1016/j.insmatheco.2021.07.002
DO - 10.1016/j.insmatheco.2021.07.002
M3 - Article
SN - 0167-6687
VL - 100
SP - 429
EP - 435
JO - Insurance: Mathematics and Economics
JF - Insurance: Mathematics and Economics
ER -