Measuring economic inequality and risk: a unifying approach based on personal gambles, societal preferences and references

The underlying idea behind the construction of indices of economic inequality is based on measuring deviations of various portions of low incomes from certain references or benchmarks, that could be point measures like population mean or median, or curves like the hypotenuse of the right triangle where every Lorenz curve falls into. In this paper we argue that by appropriately choosing population-based references, called societal references, and distributions of personal positions, called gambles, which are random, we can meaningfully unify classical and contemporary indices of economic inequality, as well as various measures of risk. To illustrate the herein proposed approach, we put forward and explore a risk measure that takes into account the relativity of large risks with respect to small ones.

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