Health and Portfolio Choices: A Diffidence Approach

Abstract

The effect of health status on portfolio decisions has been extensively studied from an empirical viewpoint. In this paper, we propose a theoretical model of individuals’ choice of financial assets under bivariate utility functions depending on wealth and health. Our model relies on the diffidence theorem, which pertains to the class of hyperplane separation theorems. We establish the conditions under which the share of wealth held in risky assets falls as: 1) individuals’ health status deteriorates and; 2) individuals’ health status becomes risky. These conditions are shown to be related to the behaviour of the intensities of correlation aversion and of cross prudence as wealth increases.

Keywords: Health, Weath, Diffidence Theorem, Indices, Correlation Aversion, Cross Prudence

JEL Classification: D81