The Effects of Increases in Risk on Optimal Loss Control: A Stochastic Dominance Approach
Publisher : Korea Insurance Research Institute
Research Area : Business Management
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We examine the effects of increases in risk on optimal loss control decision. We focus our attentions on the cases that the increases in risk take the form of both first degree and second degree stochastic dominance changes in risk. In particular, we derive a set of conditions, for each type of risk increases, that is sufficient for a risk averse decision maker to increase his investment level on loss control. For the case of risk change in type of first degree stochastic dominance the results of the comparative statics depend on Arrow-Pratt measures of risk aversion in a more or less complicated way. However in the case of risk change in type of second degree stochastic dominance Arrow-Pratt measures of risk aversion is no more useful tool to study the comparative statics. In essence, we obtain some meaningful comparative statics results by utilizing Kimball(1990)'s measures of Absolute and Relative Prudence.
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