While I am convinced that these new models are both descriptively important and intellectually stimulating, one should not forget that progress has also been made since the 70’s in the framework of the E-U model itself. To a wide extent these advances have concerned a better understanding of risk interrelationships. Thanks to the prudence concept and its recent extensions by Pratt-Zeckhauser (1987) or Gollier-Pratt (1996), we now have tools to examine how exogenous risks impact upon the management of endogenous ones. While prudence has already shown its usefulness in finance and economics problems, the purpose of this chapter was to show that it may also be relevant in medical decision making.
Using the mean value theorem we may write
Consequently (8.7) becomes:
Since from (8.3)
and since risk aversion implies:
it follows that
Q. E. D.