Journal of Banking & Finance Vol. 33 No. 8 2009
The safety first expected utility model: Experimental evidence and economic implications
Abstract
Roy’s [Roy, A., 1952. Safety first and the holding of assets. Econometrica 20 (3), 431–449] safety first criterion advocates the minimization of the probability of outcomes below a certain “disaster” level. This paper examines safety first theoretically and experimentally. We find that safety first plays a crucial role in decision-making, inducing choices that cannot be explained by, and even contradict, risk-aversion, Prospect Theory, and loss-aversion in general. Yet, safety first alone cannot explain individual choice. Therefore, we propose an expected utility – safety first (EU–SF) model where decisions are made based on a weighted average of the safety first criterion and standard expected utility maximization. We experimentally estimate these relative weights, and discuss their economic implications.
- DOI
- 10.1016/j.jbankfin.2009.02.014
- Volume
- 33
- Issue
- 8
- Pages
- 1494-1506
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib