Carole Bernard, Christoph Rheinberger, and Nicolas Treich, “Catastrophe Aversion and Risk Equity in an Interdependent World”, TSE Working Paper, n. 17-811, May 2017.
Catastrophe aversion and risk equity are important concepts in both risk management theory and practice. Keeney (1980) was the first to formally define these concepts. He demonstrated that the two concepts are always in conflict. Yet this result is based on the assumption that individual risks are independent and has thus limited relevance for real world catastrophic events. We extend Keeney’s result to dependent risks and derive the conditions under which more correlation between two risks induces a more catastrophic risk. We then generalize some of the results for multiple correlated risks.