Economic and Financial Decisions under Risk

ISBN-10: 0691122156

ISBN-13: 9780691122151

Edition: 2005

Authors: Louis Eeckhoudt, Christian Gollier, Harris Schlesinger

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Description:

An understanding of risk and how to deal with it is an essential part of modern economics. Whether liability litigation for pharmaceutical firms or an individual's having insufficient wealth to retire, risk is something that can be recognized, quantified, analyzed, treated--and incorporated into our decision-making processes. This book represents a concise summary of basic multiperiod decision-making under risk. Its detailed coverage of a broad range of topics is ideally suited for use in advanced undergraduate and introductory graduate courses either as a self-contained text, or the introductory chapters combined with a selection of later chapters can represent core reading in courses on macroeconomics, insurance, portfolio choice, or asset pricing. The authors start with the fundamentals of risk measurement and risk aversion. They then apply these concepts to insurance decisions and portfolio choice in a one-period model. After examining these decisions in their one-period setting, they devote most of the book to a multiperiod context, which adds the long-term perspective most risk management analyses require. Each chapter concludes with a discussion of the relevant literature and a set of problems. The book presents a thoroughly accessible introduction to risk, bridging the gap between the traditionally separate economics and finance literatures.
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Book details

List price: $70.00
Copyright year: 2005
Publisher: Princeton University Press
Publication date: 1/23/2005
Binding: Paperback
Pages: 248
Size: 5.75" wide x 9.00" long x 0.75" tall
Weight: 0.792
Language: English

Preface
Decision Theory
Risk Aversion
An Historical Perspective on Risk Aversion
Definition and Characterization of Risk Aversion
Risk Premium and Certainty Equivalent
Degree of Risk Aversion
Decreasing Absolute Risk Aversion and Prudence
Relative Risk Aversion
Some Classical Utility Functions
Bibliographical References, Extensions and Exercises
The Measures of Risk
Increases in Risk
Aversion to Downside Risk
First-Degree Stochastic Dominance
Bibliographical References, Extensions and Exercises
Risk Management
Insurance Decisions
Optimal Insurance: an Illustration
Optimal Coinsurance
Comparative Statics in the Coinsurance Problem
The Optimality of Deductible Insurance
Bibliographical References, Extensions and Exercises
Static Portfolio Choices
The One-Risky-One-Riskfree-Asset Model
The Effect of Background Risk
Portfolios of Risky Assets
Bibliographical References, Extensions and Exercises
Static Portfolio Choices in an Arrow-Debreu Economy
Arrow-Debreu Securities and Arbitrage Pricing
Optimal Portfolios of Arrow-Debreu Securities
A Simple Graphical Illustration
Bibliographical References, Extensions and Exercises
Consumption and Saving
Consumption and Saving under Certainty
Uncertainty and Precautionary Savings
Risky Savings and Precautionary Demand
Time Consistency
Bibliographical References, Extensions and Exercises
Dynamic Portfolio Management
Backward Induction
The Dynamic Investment Problem
Time Diversification
Portfolio Management with Predictable Returns
Learning about the Distribution of Excess Returns
Bibliographical References, Extensions and Exercises
Risk and Information
The Value of Information
Comparative Statics Analysis
The Hirshleifer Effect
Bibliographical References, Extensions and Exercises
Optimal Prevention
Prevention under Risk Neutrality
Risk Aversion and Optimal Prevention
Prudence and Optimal Prevention
Bibliographical References, Extensions and Exercises
Risk Sharing
Efficient Allocations of Risks
Risk Sharing: an Illustration
Description of the Economy and Definition
Characterization of Efficient Allocations of Risk
Aggregation of Preferences
Bibliographical References, Extensions and Exercises
Asset Pricing
Competitive Markets for Arrow-Debreu Securities
The First Theorem of Welfare Economics
The Equity Premium
The Capital Asset-Pricing Model
Two-Fund Separation Theorem
Bond Pricing
Bibliographical References, Extensions and Exercises
Extensions
Asymmetric Information
Adverse Selection
Moral Hazard
The Principal-Agent Problem
Bibliographical References, Extensions and Exercises
Alternative Decision Criteria
The Independence Axiom and the Allais Paradox
Rank-Dependent EU
Ambiguity Aversion
Prospect Theory and Loss Aversion
Some Concluding Thoughts
Bibliographical References, Extensions and Exercises
Index
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