A decision framework for a farmer who is risk averse in the Arrow-Pratt sense and downside risk averse

Guillermo Donoso

Abstract

This study provides a decision framework to analyze optimal production iversification decisions under uncertainty for a farmer who is risk averse in the Arrow-Pratt sense and downside risk averse. The decision model accounts for the third central moment of the joint distribution of portfolio returns. This is relevant for asymmetrical return distributions. This general model contains the classical decision model as a special case. The benefit of the proposed generalization is that each competing behavioral hypothesis is discerned econometrically through the significance of the agent’s coefficient of absolute and/or relative downside risk aversion.

Keywords

Downside risk; Extension of E-V model; Prudence; Risk aversion; Skewness preference

Subject classification

D21, D81, G11.

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 Universitat Politècnica de València

e-ISSN: 2174-7350   ISSN: 1578-0732   https://doi.org/10.4995/earn