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arXiv · 2311.07269

Decision-making under risk: when is utility maximization equivalent to risk minimization?

Francesco Ruscitti·Ram Sewak Dubey·Giorgio Laguzzi
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Abstract

Motivated by the analysis of a general optimal portfolio selection problem, which encompasses as special cases an optimal consumption and an optimal debt-arrangement problem, we are concerned with the questions of how a personality trait like risk-perception can be formalized and whether the two objectives of utility-maximization and risk-minimization can be both achieved simultaneously. We address these questions by developing an axiomatic foundation of preferences for which utility-maximization is equivalent to minimizing a utility-based shortfall risk measure. Our axiomatization hinges on a novel axiom in decision theory, namely the risk-perception axiom.

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Francesco Ruscitti, Ram Sewak Dubey, Giorgio Laguzzi. 2023-11-13. Decision-making under risk: when is utility maximization equivalent to risk minimization?. https://arxiv.org/abs/2311.07269

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