Loss Aversion and State-Dependent Linear Utility Functions for Monetary Returns

Somdeb Lahiri

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arXiv · 2410.19030

Loss Aversion and State-Dependent Linear Utility Functions for Monetary Returns

Somdeb Lahiri

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Abstract

We present a theory of expected utility with state-dependent linear utility functions for monetary returns, that incorporates the possibility of loss-aversion. Our results relate to first order stochastic dominance, mean-preserving spread, increasing-concave linear utility profiles and risk aversion. As an application of the expected utility theory developed here, we analyze the contract that a monopolist would offer in an insurance market that allowed for partial coverage of loss.

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econ.TH cs.GT math.OC q-fin.PM

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Somdeb Lahiri. 2024-10-24. Loss Aversion and State-Dependent Linear Utility Functions for Monetary Returns. https://arxiv.org/abs/2410.19030

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