Risk-Taking-Neutral Background Risks
نویسندگان
چکیده
This paper examines how decision making under uncertainty is affected by the presence of a background risk. By background risk, we refer to a risk for which there is no market for trading or hedging. In particular, we construct a class of background risks that we label as risk-taking-neutral (RTN). These background risks have the property that they will not alter the choice decisions made with respect to other risks. As such, these RTN background risks can provide a convenient benchmark. In many situations, a background risk that is faced by an investor can be compared to one of the RTN-class in order to predict qualitative changes in the investor’s choice decision. A proposition illustrates our benchmarking together with three examples with regards to portfolio choice: (1) effects of a flat-rate income tax, (2) effects of an independent non–positive-mean background risk, and (3) a theorem about dynamic investing due to Mossin (1968a).
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