Utility-Efficient Payoffs

Abstract

We show how to improve payoffs such that any portfolio composed of contracts with the improved payoffs is more attractive than the corresponding portfolio with the original payoffs.Starting from an axiomatic characterisation, we derive an amelioration operator that yields payoffs attractive to both risk averse buyers and sellers of financial contracts, including individuals with robust Savage preferences. For comparison with our approach, we briefly recall and slightly generalise core results on expected utility optimisation and cost-efficient payoffs.Furthermore, we obtain a new variant of the axiomatic characterisation of pricing operators and show that ameliorated payoffs do not admit generalised statistical arbitrage.