Risk Posture Research Articles

The Ranking Properties of Healthy-Years Equivalents and Quality-Adjusted Life-Years Under Certainty and Uncertainty

This paper investigates the theoretical properties of healthy-years equivalents (HYEs) and quality-adjusted life-years (QALYs). A distinction is made between ex ante HYEs (EA-HYEs) and expected HYEs (EXP-HYEs) and between risk-neutral quality-adjusted life-years (RN-QALYs) and risk-adjusted quality adjusted life-years (RA-QALYs). In the case of certainty, HYEs always rank health profiles according to individual preferences, whereas QALYs only rank health profiles according to individual preferences if constant proportional trade-off holds for all health states and if additive independence of quality in different periods holds. In the case of uncertainty, EA-HYEs always rank risky health profiles the same way as expected utility. The assumptions needed for the other measures to rank risky health profiles the same way as expected utility are: risk neutrality with respect to healthy time for EXP-HYEs; risk neutrality with respect to time in all health states and additive independence of quality in different periods for RN-HYEs; and constant proportional risk posture with respect to time in all health states and additive independence of quality in different periods for RA-QALYs.

A note on QALYs, time tradeoff, and discounting.

The theoretical model of QALYs is based on risk neutrality with respect to life years or constant proportional risk posture with respect to life years. It is shown that discounting of QALYs is inconsistent with these assumptions. For discounting to be consistent with individual preferences in a QALY model, individuals have to be risk-neutral with respect to discounted life years or exhibit constant proportional risk posture with respect to discounted life years. For the time-tradeoff method to be consistent with these assumptions, the QALY weights have to be derived by dividing the number of discounted life years in full health by the number of discounted life years in the assessed health states.

Utility assessment in cancer patients: adjustment of time tradeoff scores for the utility of life years and comparison with standard gamble scores.

The standard gamble (SG) and the time tradeoff (TTO), two frequently used methods of utility assessment, have often been found to lead to different utilities for the same health state. The authors investigated whether adjustment of TTO scores for the utility of life years (risk attitude) eliminated this difference. In addition, the association between risk attitude and sociodemographic and medical variables was studied. In 30 disease-free testicular cancer patients, SG and TTO were used to assess the utilities of four health profiles relevant to testicular cancer. Utility of life years was estimated from certainty equivalents (CEs). SG scores were significantly higher than unadjusted TTO scores for all profiles. As the majority of patients (85%) were risk-averse, CE-adjusted TTO scores were higher than unadjusted scores, and were not significantly different from those obtained from the SG for three of the four profiles. However, adjusted scores were still slightly but consistently lower than SG scores. Possible explanations for this discrepancy are discussed. An association was found between risk aversion and medical treatment: patients who had received chemotherapy for their cancers were more risk-averse than were patients who had been in a surveillance protocol only. As risk aversion can have an impact on treatment decisions, it is important to assess the risk posture of the patient to whom the decision pertains.

Risk Analysis for Information Technology

As Information Technology (IT) has become increasingly important to the competitive position of firms, managers have grown more sensitive to their organization's overall IT risk management. Recent publicity concerning losses incurred by companies because of problems with their sophisticated information systems has focused attention on the importance of these systems to the organization. In an attempt to minimize or avoid such losses, managers are employing various qualitative and quantitative risk analysis methodologies. The risk analysis literature, however, suggests that these managers typically utilize a single methodology, not a combination of methodologies. This paper proposes a risk analysis process that employs a combination of qualitative and quantitative methodologies. This process should provide managers with a better approximation of their organization's overall information technology risk posture. Practicing managers can use this proposed process as a guideline in formulating new risk analysis procedures and/or evaluating their current risk analysis procedures.

Risk aversion and the relationship between Nash's solution and subgame perfect equilibrium of sequential bargaining

This article presents some new, intuitive derivations of several results in the bargaining literature. These new derivations clarify the relationships among these results and allow them to be understood in a unified way. These results concern the way in which the risk posture of the bargainers affects the outcome of bargaining as predicted by Nash's (axiomatic) solution of a static bargaining model (Nash, 1950) and by the subgame perfect equilibrium of the infinite horizon sequential bargaining game analyzed by Rubinstein (1982). The analogous, experimentally testable predictions for finite horizon sequential bargaining games are also presented.

Parametric models of the utility of survival duration: Tests of axioms in a generic utility framework

The risk posture of a utility function is, roughly speaking, a measure of the curvature of the utility function with respect to an objectively quantified dimension like money or survival duration. Risk posture with respect to survival duration is critically important in the normative decision analysis of medical therapy selection because medical choices often involve therapies that differ in their trade-offs between short- and long-term survival, e.g., between surgical and nonsurgical treatments. Power utility functions and exponential utility functions are potentially useful in the normative analysis of medical decisions because they provide simple representations of risk posture with respect to survival duration. The present study formulates and tests axiomatic characterizations of power and exponential utility models within a theoretical framework called the generic utility theory. The formalizations generalize the work of J. W. Pratt on parametric characterizations of risk attitude. An experiment is reported in which the hypotheses that the utility of survival duration is a linear, exponential, logarithmic, or power function are tested. The experiment illustrates how to apply statistical criteria to the empirical test of preference axioms. Experimental results show that the linear, exponential, logarithmic, and power utility models are all violated by a substantial proportion of subjects. Qualitative analyses of the pattern of violations suggest that the linear and exponential utility models are a better approximation of subjects' preference than the logarithmic and power utility models. The formalizations and experimental tests are carried out within the generic utility theory because the assumptions of this theory are consistent with important “strong” utility theories, including expected utility theory, subjective expected utility theory, the dual bilinear model, and prospect theory. Investigations of utility models within the generic utility framework are interpretable from the standpoint of stronger theories, but are not committed to the hypothesis that a particular strong utility theory is valid.

A re-examination of Harrison's experimental test for risk aversion

This paper examines several aspects of Harrison's (1986) test for the risk attitudes of experimental subjects. We identify specific refinements to Harrison's test that must be adopted in order to establish correctly a subject's risk posture.

Evaluating four years of ID experience

precise day-to-day agreement of responsibilities must be negotiated since a variety of new demands are made on each department concerned. The third step requires conscious training of managers within the training department to think of themselves as business professionals. Since most training professionals have not received extensive business courses in their formal education, they need to be exposed to the full gamut of business planning techniques, including sales forecasting, relevant financial analysis, advertising, and promotional planning. In addition to these three steps, two overall planning issues must be weighed. First, the transition to this system will probably evolve over a number of years. Relationships based on trust must be developed among the training, sponsor, and user departments. The development of these relationships and new skills and roles that will be required of training department personnel will take time to put into place. Usually several successful program development cycles will be required in order to establish the trust and working relationship to the satisfaction of all. The second consideration is that this approach requires an entrepreneurial orientation and hence a higher risk posture for the training department. New relationships, skills, and expectations will often times be vastly different from current operations. Training department staff members must be encouraged to take reasonable business risks associated with this method of operation. This involves time, patience, and perserverance on the part of management. Professional competence? An absolutely essential foundation. However, this competency alone was only part of our long-range strategy. The other essential elements revolved around developing organizational sponsors thus ensuring alignment with the rest of the business, and aggressively selling our products and services. Evaluating Four Years of ID Experience

Utility Functions for Life Years and Health Status

Multiattribute utility theory is used to suggest a form for a utility function over life years and health status. The analysis is motivated by consideration of two diseases—coronary artery disease and chronic kidney disease—in which the choice of treatment may depend on the patient's tradeoff between these attributes. Certain plausible independence properties lead to a quasi-additive utility function for life years and health status. Particular attention is given to utility functions for life years exhibiting constant proportional risk posture. An empirical assessment shows that stated preferences appear consistent with this functional form. The derived utility functions have been applied to the treatment decision of whether to prescribe coronary artery bypass graft surgery in patients with coronary artery disease.

Equivalent Risk Classes: A Multidimensional Examination

It is commonplace within the confines of finance literature to explain variations in the firm's residual income stream via the dichotomy of business risk and financial risk. On an ex-post basis the business risk of the enterprise is a direct result of the firm's investment decision and is, thereby, embodied in its asset structure. It follows that the company's cost structure, product demand characteristics, intra-industry competi? tive position, and managerial talent all affect its business risk posture. Financial risk, on the other hand, is a direct result of the firm's financing de? cision. It is more easily controlled by management than business risk and arises primarily from the use of securities bearing a fixed rate of return in the corporate finan? cial structure. As the degree of trading on the equity is increased, the earnings flow available to the common stockholders exhibits increased variability. Additionally, the owners endure an increased chance of the risk of ruin. This paper deals with the fundamental concept of business risk classes. We seriously question the proposition that industry groupings of firms suffice as effective sur? rogates for equivalent risk classes. The position taken here is that business risk is in reality multidimensional. Attempts to utilize univariate definitions, although convenient (e.g., the standard error about a trend equation for operating income), can be vastly improved upon with regard to effective use in financial research and ultimate policy formulation. The objectives of this work are to formulate a multivariate definition of business risk and present a procedure for its implementation. Section II discusses the importance of the risk class concept from theoretical and practical standpoints. In Section III the relation of this study to earlier efforts on the same topic is noted. Section IV contains a description of the underlying determinants

The Nash Solution and the Utility of Bargaining

It has recently been shown that the utility of playing a game with side payments depends on a parameter called strategic risk posture. The Shapley value is the risk neutral utility function for games with side payments. In this paper, utility functions are derived for bargaining games without side payments, and it is shown that these functions are also determined by the strategic risk posture. The Nash solution is the risk neutral utility function for bargaining games without side payments. RECENT WORK HAS SHOWN that the Shapley value for a game with side payments is a cardinal utility function which reflects the desirability of playing different positions in a game, or in different games (cf. Shapley [14], Roth [9]). A player's utility for playing some position in a game is determined in part by his assessment of the payoff he will receive in a class of games with side payments called bargaining games. Given a player's evaluation of these bargaining games, his utility for playing a position in any game with side payments can be determined (cf. Roth [11]). It is desirable to extend these results to games without side payments, since the assumption that side payments can be made is not appropriate in many situations. In this paper we will derive a class of utility functions for playing bargaining games without side payments. Games of this sort are studied by Nash [7], who developed a solution to bargaining games which is an extension of the Shapley value for games with side payments. That is, the Nash solution coincides with the Shapley value for bargaining games with side payments. Somewhat surprisingly, the utility of playing a bargaining game without side payments is determined by the same considerations which determine the utility of playing a game with side payments. Given a player's evaluation of bargaining games with side payments, his utility for bargaining without side payments is determined.

Multivariate constant risk posture

Multivariate constant risk posture

Decision Analysis for Exchange Risk Management

One of the factors which complicates financial decision making in a multinational enterprise is currency devaluations or revaluations in countries where subsidiaries are located. Since exchange rate changes affect the reported earnings, value of financial assets, and future earnings of the multinational corporation, it is imperative that the financial decision maker of such a firm develop a strategy to manage the foreign exchange risk assumed by the firm. It is the purpose of this article to develop relatively formal decision rules for managing the risk of exchange rate change. These rules are based on an analysis of a theoretical decision model of the exchange management process. The inherent uncertainty involved in exchange rate movements is the basic feature of the exchange risk situation. The nature of an optimal decision thus will depend on the attitudes of management toward risk and uncertainty. Four common attitudes will be assumed and examined: minimum variance, minimax, expected monetary value, and expected utility. Each yields a particular set of optimal rules for exchange risk adjustment. Three techniques are available for adjusting the exchange risk posture of the firm. These are (1) adjustment of funds flows, (2) forward contracts, and (3) exposure netting. Adjustment-of-funds-flow techniques involve an alteration in the planned funds flows of parent and/or subsidiaries, in amount and/or currency of denomination, with the view of reducing (or increasing) the local currency accounting exposure of the corporation. This exposure is defined as the difference in local currency assets translated to domestic currency at the current exchange rate and local currency liabilities translated at the same exchange rate. If the objective of management is to decrease exposure, the technique must increase local currency denominated liabilities or decrease local currency denominated assets. Techniques for increasing liabilities include local borrowing and stretching payables. Techniques for decreasing assets include reduction of cash balances and other liquid assets, reduction in investment in accounts receivable (either by tightening credit terms or factoring), and reduction in inventory investment (if inventories are translated at the current exchange rate). Each of these techniques generates local currency funds. If exposure is to be reduced, these funds must be used to acquire assets which are not exposed to the exchange risk. For example, if the parent corporation had planned to provide domestic currency funds to the subsidiary, locally generated funds can replace funds from the parent. Alternatively,