more general measure of risk aversion when utility is state-dependent
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more general measure of risk aversion when utility is state-dependent

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Published by University of Cambridge Department of Applied Economics in Cambridge .
Written in English


Book details:

Edition Notes

Statementby David Kelsey and Gerald L. Nordquist.
SeriesEconomic theory discussion paper -- no. 130
ContributionsNordquist, Gerald L., University of Cambridge. Department of Applied Economics.
ID Numbers
Open LibraryOL15389472M

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  Kelsey, D. and Nordquist, G.: , ‘A More General Measure of Risk Aversion when Utility is State-Dependent’, Oxford Economic Papers, 43, 59– Google Scholar Nordquist, G.: , ‘On the Risk-Aversion Comparability of State-Dependent Utility Cited by: 2. Abstract. We consider here the problem of how to measure risk aversion in the case of state-dependent utility. As is now well recognized, to assume that an individual’s utility function is state-dependent is warranted if not required in situations where decisions have uncertain consequences not only for income or wealth but for such things as life and : Gerald L. Nordquist. In this paper the author develops measures of absolute risk aversion for preference relations on risky prospects that are state-dependent and are representable by Frechet differentiable, nonlinear. This book presents a self-contained, comprehensive, and unified treatment of the theory of decision making under uncertainty with state dependent preferences. The author begins by setting forth axiomatic foundations of subjective expected utility theory with stat-dependent preferences. He then develops measures of risk aversion and of risk for state-dependent utility functions and shows how they can be applied to decisions involving health and life insurance.

2. Development of the concepts of utility and risk-aversion. The study of utility as a way of explaining people’s actions has a long and illustrious history, having gained the attention of a series of distinguished scholars, from Daniel Bernoulli to John von Neumann. The derivatives of utility have a particular importance in economic by: Definition and Characterization of Risk Aversion 7 utility 12 a c d f e wealth Figure Measuring the expecting utility of final wealth (, 1 2;, 1 2). Definition and Characterization of Risk Aversion We assume that the decision maker lives for File Size: KB. Risk Averse: A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. In other words, among various investments giving the same return with different level of risks, this investor always prefers the alternative with least interest. Description: A risk averse investor avoids. The relative risk aversion measure, R u (x), is briefly discussed after A u (x) is carefully described. Definition The absolute risk aversion measure A u (x) for N-M utility function u(x) is A u (x) =-u ″ (x) u ′ (x). Two things concerning A u (x) are worth noting at the outset. First, absolute risk aversion is defined for outcomes in Cited by: 3.

the presence of background risk and/or state-dependent utility. Under more general preferences, the new measure incorporates both second-order risk aversion and second-order uncertainty aversion. A non-neutral attitude toward uncertainty is revealed when a decision maker isFile Size: KB. One such measure is the Arrow–Pratt measure of absolute risk aversion (ARA), after the economists Kenneth Arrow and John W. Pratt, also known as the coefficient of absolute risk aversion, defined as = − ″ ′ (). But in a more general setting optimal purchase of actuarially fair insurance only equates the marginal utility in the various states. Insurance with State-Dependent Utility Some accidents and illnesses can change utility at each wealth level. Model this with state-dependent utility . The notion of risk aversion was originally developed with reference to the Expected Utility model. de Finetti (), Pratt () and Arrow () associated the concavity of the von Neumann Author: Aldo Montesano.