Broadly Decreasing Risk Aversion
AbstractThis 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-a-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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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 45 (1999)
Issue (Month): 10 (October)
decision-making under risk; choice under uncertainty; two risk sources; risk premium; risk averse firm; portfolio choice;
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- Gelles, Gregory M. & Mitchell, Douglas W., 2002. "Increasingly mean-seeking utility functions and n-asset portfolios," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(5), pages 911-919.
- Keenan, Donald C. & Snow, Arthur, 2012. "Ross risk vulnerability for introductions and changes in background risk," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 197-206.
- Martin Bohner & Gregory Gelles, 2012. "Risk aversion and risk vulnerability in the continuous and discrete case," Decisions in Economics and Finance, Springer, vol. 35(1), pages 1-28, May.
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