On the characterisation of investor preferences by changes in wealth

On the characterisation of investor preferences by changes in wealth

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Article ID: iaor20023127
Country: Netherlands
Volume: 26
Issue: 3
Start Page Number: 175
End Page Number: 193
Publication Date: Dec 2001
Journal: Geneva Papers on Risk and Insurance Theory
Authors: ,
Keywords: utility
Abstract:

As wealth increases, preference of one fixed gamble over another typically changes once or not at all. A key question is whether certain assumptions on preferences guarantee such behaviour. Bell has addressed this difficult question and characterised the specific functional form of utility functions which allow a finite number of switches between two arbitrary gambles over the entire range of initial wealth. By extending this analysis, and linking the discussion to more recent works, the authors characterise conditions under which a large set of utility functions change with respect to their switching characteristics, and discuss the results in the context of the classical notion of decreasing absolute risk aversion.

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