Health and portfolio choices: A diffidence approach

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 approach makes an extensive use of the diffidence theorem. We establish the conditions under which the share of wealth held in risky assets falls as: (I) individuals' health status deteriorates and; (2) individuals' health status becomes risky. These conditions are shown to be related to the behavior of the intensities of correlation aversion and of cross prudence as wealth increases. (C) 2016 Elsevier B.V. All rights reserved.