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Decision-making under risk: when is utility-maximization equivalent to risk-minimization?

Author

Listed:
  • Francesco Ruscitti

    (John Cabot University)

  • Ram Sewak Dubey

    (Montclair State University)

  • Giorgio Laguzzi

    (University of Eastern Piedmont)

Abstract

Motivated by the analysis of a general optimal portfolio selection problem, which encompasses as special cases an optimal consumption and an optimal debt-arrangement problem, we are concerned with the questions of how a personality trait like risk-perception can be formalized and whether the two objectives of utility-maximization and risk-minimization can be both achieved simultaneously. We address these questions by developing an axiomatic foundation of preferences for which utility-maximization is equivalent to minimizing a utility-based shortfall risk measure. Our axiomatization hinges on a novel axiom in decision theory, namely the risk-perception axiom.

Suggested Citation

  • Francesco Ruscitti & Ram Sewak Dubey & Giorgio Laguzzi, 2024. "Decision-making under risk: when is utility-maximization equivalent to risk-minimization?," Theory and Decision, Springer, vol. 97(1), pages 23-38, August.
    • Handle: RePEc:kap:theord:v:97:y:2024:i:1:d:10.1007_s11238-023-09969-1
    DOI: 10.1007/s11238-023-09969-1
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