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Private Risk

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  • Kaufman, Gordon M.
  • Mattar, Mahdi

Abstract

We extend the traditional decision analytic approach to calculation of the buying (selling) price of a lottery by allowing a risk averse (risk prone) decision maker to rebalance his financial portfolio in the course of determination of these prices. Building on the classical portfolio allocation problem in complete markets, we generalize the standard treatment to include both traded and non-traded unique risks. Our principal focus is on private risks-risks that are not tradable or traded in financial markets. We show that allowing portfolio rebalancing in a distributive bargaining setting with risk averse negotiators expands the zone of possible agreement [ZOPA] relative to the ZOPA yielded when rebalancing is not allowed.

Suggested Citation

  • Kaufman, Gordon M. & Mattar, Mahdi, 2003. "Private Risk," Working papers 4316-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    • Handle: RePEc:mit:sloanp:3525
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    File URL: http://hdl.handle.net/1721.1/3525
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    References listed on IDEAS

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    4. Ronald A. Howard, 1988. "Decision Analysis: Practice and Promise," Management Science, INFORMS, vol. 34(6), pages 679-695, June.
    5. Fama, Eugene F, 1996. "Discounting under Uncertainty," The Journal of Business, University of Chicago Press, vol. 69(4), pages 415-428, October.
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    Keywords

    Private Risks; Portfolio Rebalancing;

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