Multivariate concave and convex stochastic dominance

Stochastic dominance permits a partial ordering of alternatives (probability distributions on consequences) based only on partial information about a decision maker’s utility function. Univariate stochastic dominance has been widely studied and applied, with general agreement on classes of utility functions for dominance of different degrees. Extensions to the multivariate case have received less attention and have used different classes of utility functions, some of which require strong assumptions about utility. We investigate multivariate stochastic dominance using a class of utility functions that is consistent with a basic preference assumption, can be related to well-known characteristics of utility, and is a natural extension of the stochastic order typically used in the univariate case. These utility functions are multivariate risk averse, and reversing the preference assumption allows us to investigate stochastic dominance for utility functions that are multivariate risk seeking. We provide insight into these two contrasting forms of stochastic dominance, develop some criteria to compare probability distributions (hence alternatives) via multivariate stochastic dominance, and illustrate how this dominance could be used in practice to identify inferior alternatives. Connections between our approach and dominance using different stochastic orders are discussed.decision analysis: multiple criteria, risk; group decisions; utility/preference: multiattribute utility, stochastic dominance, stochastic orders

Aversion to Health Inequalities and Priority Setting in Health Care

Traditionally aversion to health inequality is modelled through a concave utility function over health outcomes. Bleichrodt et al. (2004) have suggested a "dual" approach based on the introduction of explicit equity weights. The purpose of this paper is to analyze how priorities in health care are determined in the framework of these two models. It turns out that policy implications are highly sensitive to the choice of the model that will represent aversion to health inequality

Mental accounting, access motives, and overinsurance

People exercising mental accounting have an additional motive for buying insurance. They perceive a risk of having insufficient funds available to self-insure. In this way insurance protects the consumption value of the insured asset beyond the expenditure to acquire/replace it. This complements previous approaches based on probability weighting and loss aversion to explain the high profitability of warranties and an aversion toward deductibles. It helps to account for why the value of a warranty is found to be positively related to the value of the product and why there is seemingly contradictory empirical evidence on how household income affects demand for warranties. The adapted model rationalizes a strong aversion to deductibles, and explains the observed sensitivity of this aversion to the insurance context. Finally, it predicts a strong impact of how an insurer pays out benefits on the value and cost of insurance. This can explain both the evidence on strong deductible aversion for flood insurance and the lack of such evidence for long-term care insurance

Firm's Demand for Insurance: An Explorative Approach

This paper addresses the question, what influences the insurance demand of companies and examines the influence of managerial risk aversion in this decision process. An explorative research approach based on qualitative data analysis is applied to explore the factors influencing the insurance related decision behavior in organizations. Using interviews and observations of firm’s insurance managers, the results identify interdependencies between factors of insurance demand, such as ownership structure, managerial discretion, volatility of earning, size, services of the insurer and business diversification which allows to propose a framework of contextual factors affecting company’s insurance demand. Within this framework, the data imply managerial risk attitudes as decisive factor in the decision process about insurance demand in companies. This explorative study enriches the existing theories of firms’ insurance demand and addresses feedback from practice into theory