The Effects of FSD Changes in Multiplicative Background Risk on Risk-Taking Attitude

Abstract

This paper analyzes the effects of first-degree stochastic dominance (FSD) changes in multiplicative background risk on the risk-taking attitude of a decision maker. First, we consider contractive FSD changes in multiplicative background risk and analyze the effect of these changes. Then we consider general FSD change in multiplicative background risk. Also, within the context of coinsurance, we examine the effects of simple FSD changes and monotone likelihood ratio (MLR) changes in multiplicative background risk.