Disaster aversion in the mean-disaster framework and its applications

Abstract Risk is often understood as the likelihood of a disastrous event despite the predominant notion of risk measured by the dispersion in the distribution of an outcome variable. In a mean-disaster framework, this paper proposes a measure of disaster aversion and studies the three often-encountered problems of decision making under risk: self-protection, portfolio choice, and insurance demand. Clear-cut intuitive comparative statics results are obtained for each of these decisions with respect to the effect of the strength of disaster aversion.