Broadly decreasing risk aversion

Broadly decreasing risk aversion

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Article ID: iaor20002057
Country: United States
Volume: 45
Issue: 10
Start Page Number: 1432
End Page Number: 1439
Publication Date: Oct 1999
Journal: Management Science
Authors: ,
Keywords: decision, finance & banking
Abstract:

This paper considers decision-making in the presence of two additive risk sources, with no restrictions on the relation between the two risks. A utility function is said to exhibit broad DARA if and only if a rise in wealth always decreases the magnitude of the risk premium for one of the risks vis-à-vis the other. A condition on utility functions giving this property is derived: utility must be of the linear plus exponential form. It is shown that certain problems involving portfolios and risk-averse firms give unambiguous comparative statics if and only if utility exhibits broad DARA.

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