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Market-Based Solutions to Vital Economic Issues


Market-Based Solutions to Vital Economic Issues
Dec 31, 2014

A Closer Look at the Aumann-Serrano and Foster-Hart Measures of Riskiness


Hart (2011) argues that the Aumann and Serrano (2008) and Foster and Hart (2009) measures of riskiness have an objective and universal appeal with respect to a subset of expected utility preferences, UH. We show that mean-riskiness decision-making criteria using either measure violate expected utility and are generally inconsistent with optimal portfolio choices made by investors with preferences in UH. We also demonstrate that riskiness measures satisfying Hart’s other behavioral requirements do not generally exist when his argument is generalized to incorporate non-expected utility preferences. Finally, we identify other attributes of the Aumann-Serrano and Foster-Hart measures that raise concerns over their operationalizability and usefulness in various decision making, risk management, and risk assessment settings.

Note: Working papers, including any findings, may differ from the final version chosen for publication in academic journals.

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