Decomposing the Cross Derivatives of a Multiattribute Utility Function into Risk Attitude and Value

• Authors: Ali E. Abbas
• Venue: Decision Analysis
• Year: 2011

The cross derivatives of a multiattribute utility function play an important role in the choice between multivariate lotteries and in multiattribute Taylor expansions of the utility function. This paper decomposes the cross derivatives into two components: the derivatives of a single-attribute utility function over value and the cross derivatives of the value function. This approach provides a simple method for reasoning about the signs of the cross derivatives of a multiattribute utility function using derivatives of a univariate utility function and the properties of the value function. To illustrate the approach, we relate the multivariate risk aversion concept, which involves the mixed partial derivative of the utility function, to the Arrow--Pratt risk aversion function. We show that for additive value functions, a decision maker is multivariate risk averse if and only if he is risk averse over value in the Arrow--Pratt sense. For other value functions, however, a decision maker can be risk averse or risk seeking over value and still exhibit multivariate risk aversion. The approach also derives the conditions on the value function that relate two important classes of utility functions: single attribute utility functions whose derivatives alternate in sign and multiattribute utility functions whose cross derivatives alternate in sign. These two classes are widely used in practice and form the basis of univariate and multivariate stochastic dominance. Several examples illustrate the approach.