Special issue in honor of Harris Schlesinger: New developments in the study of risk preferences

The Geneva Risk and Insurance Review, May 2018

Cary Deck, Sebastian Ebert, Andreas Richter

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Special issue in honor of Harris Schlesinger: New developments in the study of risk preferences

Following a long illness, Harris Schlesinger died on September Special issue in honor of Harris Schlesinger: New developments in the study of risk preferences Cary Deck 0 1 2 Sebastian Ebert 0 1 2 Andreas Richter 0 1 2 Sebastian Ebert 0 1 2 Andreas Richter 0 1 2 0 Institut für Risikomanagement und Versicherung, LMU München , Schackstraße 4/III, Zi. 305, 80539 München , Germany 1 Frankfurt School of Finance and Management , Adickesallee 32-34, 60322 Frankfurt am Main , Germany 2 Culverhouse College of Commerce, University of Alabama , 361 Stadium Dr., Tuscaloosa, AL 35487 , USA - European Group of Risk and Insurance Economists (EGRIE) and was president in 2006–2007. Harris also served as President of the American Risk and Insurance Association (1997–1998), a member of its Board of Directors (1991–1998), and held editorial positions on its flagship journal, the Journal of Risk and Insurance. Given the importance of Harris Schlesinger’s contribution to the risk and insurance economics community, it was decided that both the Geneva Risk and Insurance Review and the Journal of Risk and Insurance would jointly dedicate special issues in his honor in appreciation of Harris’s impact on the academic community. This special issue of the Geneva Risk and Insurance Review in honor of Harris Schlesinger features five articles. A major theme in Harris’s work is behavior under risk within the expected utility model. In the first article of this issue, Gollier and Kimball (2018) provide several fundamental results on this matter. The authors study two general types of risk comparisons, which are referred to as being “contingent” and “non-contingent” (on a reference lottery), respectively. The authors illustrate the economic relevance of each risk comparison, clarify their relationship, and propose a general solution concept to problems involving these comparisons using the “basis” approach. While the basis approach has often been used implicitly, the current paper makes a methodological contribution by making the basis approach itself as well as the range of its application explicit. Ambiguity is a condition where the probabilities of possible events are not uniquely assigned. Harris contributed to our understanding of the effects of ambiguity on optimal behavior (Osaki and Schlesinger 2014a, b) and of its experimental measurement including higher-order ambiguity preferences (Baillon et  al. 2018) . When decision-makers are averse to ambiguity, they value information that reduces it (Snow 2010) , although the process of acquiring information may actually increase ambiguity, for example, due to the uncertainty of which (genetic) test results will be obtained (Hoy et al. 2014) . Nocetti (2018) presents a model that facilitates the distinction between posterior uncertainty over the correct probability distribution and uncertainty over the message that will be received from a given message service. This allows to integrate the existing results by identifying attitudes towards both sources of ambiguity separately. In such a more general model, the comparative statics of the value of information under ambiguity resemble the comparative statics of the value of information under risk to a much larger degree. “A well-known result in the insurance literature states that a risk averter who is offered insurance at a ‘fair’ price will choose to fully insure.” Doherty and Schlesinger (1990, p. 243). But Schlesinger and Schulenburg (1987) and Doherty and Schlesinger (1990) show that this holds only when there is no risk of default by the insurer. In those papers, Harris and his respective coauthors assume that the individual’s behavior is characterized by expected utility theory. Harrison and Ng (2018) use experiments to examine this setting. They find that allowing for non-expected utility preferences by participants suggests that welfare loss is not as significant as when all participants are assumed to have expected utility preferences. Courbage et  al. (2018 ) contribute an article on higher-order risk preferences, an area of research that was significantly advanced by Harris. The authors derive new properties of the Nth-order utility premium that was also examined in one of Harris’s most recent articles, Ebert et  al. (2017 ). The Nth-order utility premium measures the pain associated with facing the passage of one risk to a more severe risk. The authors analyze the superadditivity of the Nth-order utility premium and relate it to concepts such as mixed risk aversion (Caballé and Pomansky 1996) , a preference for combining good with bad (Eeckhoudt et  al. 2009) , or risk apportionment (Eeckhoudt and Schlesinger 2006) . In the final article of this issue, Bostian and Heinzel (2018) also investigate higher-order risk effects. But, unlike most articles on higher-order risk preferences, the authors study them in a recursive utility framework rather than in the classical expected utility model. This (...truncated)


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Cary Deck, Sebastian Ebert, Andreas Richter. Special issue in honor of Harris Schlesinger: New developments in the study of risk preferences, The Geneva Risk and Insurance Review, 2018, pp. 1-4, Volume 43, Issue 1, DOI: 10.1057/s10713-018-0031-1