Risk measures based on behavioural economics theory (Q1709605)

The authors propose two new classes of risk measures based on behavioural economics theory which are the generalized quantiles based on rank dependent expected utility (RDEU) and the generalized shortfalls induced from cumulative prospect theory (CPT). The risk measures based on these behavioural economics theories cover important risk measures such as distortion risk measures, expectiles and shortfall risk measures. The authors show that the classes of risk measures derived from RDEU theory and CPT are equivalent, present the properties of the proposed risk measures and give sufficient and necessary conditions for them to be coherent and convex, respectively. As applications of these results, new coherent or convex, but not coherent risk measures can be obtained by choosing appropriate utility functions and distortion functions.