Dual theory of choice with multivariate risks

Abstract: We propose a multivariate extension of Yaari's dual theory of choice under risk. We show that a decision maker with a preference relation on multidimensional prospects that preserves first order stochastic dominance and satisfies comonotonic independence behaves as if evaluating prospects using a weighted sum of quantiles. Both the notions of quantiles and of comonotonicity are extended to the multivariate framework using optimal transportation maps. Finally, risk averse decision makers are characterized within this framework and their local utility functions are derived. Applications to the measurement of multi-attribute inequality are also discussed.

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From the conclusion: ``\dots decision makers that are sensitive to hedging of comonotonic risks are shown to evaluate prospects using a weighted sum of quantiles. Risk averse decision makers were shown to be characterized within this framework by a reference distribution, making the dual theory as readily applicable as expected utility.NEWLINENEWLINE The authors also discuss other multivariate notions of comontonicity, especially a generalization by Schmeidler. The generalizations of Schmeidler and of the authors are equivalent for dimension 1; in higher dimensions, neither of these two concepts implies the other.

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