| Summary: | 碩士 === 國立臺灣科技大學 === 財務金融研究所 === 101 === Generally, we assume public to be risk averse. Thus, we can make a lot of inferences, by using this simple assumption. Risk scientist or economist developed a variety of different theories. They became the cornerstone of modern risk and economy theories.
But the assumption of risk averse cannot be fitted with some problems of risk preference, due to the extensive definition of risk aversion. That is because its constraint is ”first-order differential utility function is greater than zero” and “the second derivative is less than zero”. Under this assumption, the type of the theory is very beautiful. But when we applied it in the reality, we found a lot of restriction.
Central Dominance (CD) is a theory for the criteria describing demand changes while the risk changes. The criteria are under risk aversion. If all the risk aversion investors have the same directions of change in demand, we can use this criterion to find the answer. But the definition of risk aversion is extensive. If all the risk aversion investors have the same characteristics, this criterion can work. On the other hand, the criterion cannot work as long as there is one percent or even a thousandth of the risk aversion investors have different direction of demand change.
Therefore, Huang, Tzeng and Shih (2012) developed Almost Central Dominance (ACD) by restricting the utility function. ACD doesn’t include the one who is unimportant economically.
This theory has the advantage that it eliminates some of the people who should be eliminated. There are some decisions of risk issue which are obvious. Most of us would choose A instead of choosing B. But economically unimportant person often makes some counter-intuitive decision. For example, some extreme risk aversion investors believe that one hundred thousand is equal to one billion is the same for them. It leads in some situations of risk change , these investor will choose opposite decision of most decision makers.
The theory explores the changing demand after the risk changes. However, the utility change of the decision makers is also an important issue of risk. Hollifield and Kraus (2009) used to define the bad news for risk aversion investors. The meaning of bad news is after the risk changes, the utility and demand of the investor both decline. The criterion of bad news is quite simple. They found a very pretty Arabic numerals "1".It can help us to be a criteria of bad news. This paper would like to know whether the criterion Hollifield and Kraus (2009) found is also applied to ACD or not.
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