Decision principles derived from risk measures |
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Authors: | Marc J Goovaerts Rob Kaas |
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Institution: | a University of Leuven, Department of Applied Economics, Naamsestraat 69, B-3000 Leuven, Belgiumb University of Amsterdam, Department of Quantitative Economics, Roetersstraat 11, 1018 WB Amsterdam, The Netherlandsc Tilburg University and CentER, Department of Econometrics and Operations Research, P.O. Box 90153, 5000 LE Tilburg, The Netherlands |
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Abstract: | In this paper, we argue that a distinction exists between risk measures and decision principles. Though both are functionals assigning a real number to a random variable, we think there is a hierarchy between the two concepts. Risk measures operate on the first “level”, quantifying the risk in the situation under consideration, while decision principles operate on the second “level”, often being derived from the risk measure. We illustrate this distinction with several canonical examples of economic situations encountered in insurance and finance.Special attention is paid to the role of axiomatic characterizations in determining risk measures and decision principles. Some new axiomatic characterizations of families of risk measures and decision principles are also presented. |
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Keywords: | D81 G10 G20 |
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