Risk taking with background risk under recursive rank-dependent utility

Evidence from both the lab and eld suggest that the presence of background risk increases a decision-maker's risk aversion. Evidence from the lab suggests that behaviour deviates from expected utility, however, existing analyses of non-expected utility theories suggest many such theories cannot accommodate both ndings. Additionally motivated by evidence that people fail to reduce compound lotteries in lab experiments, this paper assumes that a decisionmaker treats a risk-taking decision in the presence of background risk as a compound lottery, and evaluates this compound lottery recursively using rankdependent utility, and studies how background risk a ects risk-taking behaviour in the recursive rank-dependent utility model. I nd that adding background risk increases risk aversion in this model under the same conditions whenever the utility-for-wealth function is risk vulnerable.