Risk and Time Economics

Author: Christian Gollier
Publisher:
Publish Date: 2003-05-01
Features: One of the innovations of this book is its refusal to use simple utility functions to solve complex decision-making and market equilibrium problems under uncertainty. This approach has two advantages. First, it allows us to better understand the fundamental concepts related to optimal behavior under uncertainty. Second, it reconstructs the rich and diverse framework of expected utility—something that people seem to have forgotten, as they often impose highly simplified restrictions on utility functions for ease of use. The book updates and develops the application of expected utility theory in risk analysis and financial decision-making. In the 1940s, Von Neumann and Morgenstern pioneered the application of expected utility theory, but most utility functions used in financial management remain relatively simple and assume a mean-variance world. Considering the recent advances in the economics of risk and uncertainty, this book focuses on the richer applications of expected utility in finance, macroeconomics, and environmental economics. The book is divided into 8 parts, with a total of 27 chapters. Part I establishes the theory of expected utility and its related concepts. Part II studies the standard portfolio problem under uncertainty, involving two different assets. Part III introduces the basic hyperplane separation theorem and logarithmic supermodular functions as technical tools for solving various decision-making problems under uncertainty. Part IV analyzes choice problems involving multiple risks. Part V examines the Arrow-Debreu portfolio problem, while Part VI analyzes consumption and savings. Building on the analysis in the earlier parts, Part VII examines the determination of equilibrium prices for risk and time in an Arrow-Debreu economy and analyzes how risk is traded. Part VIII studies dynamic models of decision-making when there is an expected flow of information about future risks over time. This book is suitable for students and experts. The concepts provided are both intuitive and formal, and the theory is balanced with practical considerations. Exercises are included at the end of each chapter.