An Ordinal Theory of Risk and Correlation Aversion

Abstract

This paper sets out an analytical framework for decision-making under risk that assumes only utility-representable preferences but is capable of replicating and extending important results obtained in the EU framework. Focusing on decision problems where attitudes towards risk and correlation play an essential role, we show that characterizing attitudes towards risk and correlation in terms of an ordinal utility function of decision parameters enables the extension of existing results obtained in the EU framework on optimal decisions in their relation to how the endogenous and non-financial background risks are correlated to a setting assuming only utility-representable preferences.