Greater Mutual Aggravation

Abstract

A large strand of research has identified conditions on preferences under which (i) a single risk is undesirable and (ii) two independent risks aggravate each other. We extend this line of inquiry by establishing conditions such that (iii) the degree of mutual aggravation is greater for more severe risks. Here, the severity of risks is characterized by means of general stochastic dominance shifts and also via moment-preserving stochastic transformations. Greater mutual aggravation is implied by all commonly used utility functions and may thus be regarded a typical property of expected utility preferences. We show that greater mutual aggravation determines the comparative statics of risk changes in several risk management problems, including precautionary saving, intertemporal risk-taking, and self-protection. Greater mutual aggravation further explains recent experimental findings on higher-order risk preferences. Finally, it offers a new, simple, and efficient method to elicit risk preferences up to "very" high orders.

Exploring the Consistency of Higher Order Risk Preferences

“…We believe that, because of this complexity, assessing behavior in the respective lotteries with fifth-and sixth-order variations of risk is quite useful because it provides an even tougher test for the theoretical predictions. Very recently, Ebert et al (2017) proposed an alternative method to elicit higher order risk preferences. Their theory is based on greater mutual aggravation and does not require complex doubly-compounded lotteries.…”

“…Very recently, Ebert et al. () proposed an alternative method to elicit higher order risk preferences. Their theory is based on greater mutual aggravation and does not require complex doubly‐compounded lotteries.…”

On the Robustness of Higher Order Risk Preferences

“…Ebert and van de Kuilen (2015) also use risks incurred today with risks incurred in the future.5 Ebert, Nocetti, and Schlesinger (2016) suggest a modified experimental approach to identifying higher order risk attitudes.…”

On Temperance and Risks Spreading

“…Ebert et al (2017) andCourbage et al (2018) respectively reinterpretEeckhoudt and Schlesinger (2006)'s results by showing that temperance ensures mutual aggravation, respectively mutual mitigation, of risk changes.…”