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First-order risk aversion and non-differentiability (*)

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Author Info

  • Uzi Segal

    (Department of Economics, University of Western Ontario, London, CANADA N6A 5C2)

  • Avia Spivak

    (Department of Economics, Ben Gurion University, Beer Sheva 84105, ISRAEL)

Abstract

First-order risk aversion happens when the risk premium a decision maker is willing to pay to avoid the lottery $t\cdot {\tilde \epsilon }, E[{\tilde \epsilon }]=0,$ is proportional, for small t, to t. Equivalently, $\partial \pi /\partial t\mid_{t=0^{+}}> 0.$ We show that first-order risk aversion is equivalent to a certain non-differentiability of some of the local utility functions (Machina [7]).

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 9 (1996)
Issue (Month): 1 ()
Pages: 179-183

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Handle: RePEc:spr:joecth:v:9:y:1996:i:1:p:179-183

Note: Received: June 26, 1995; revised version November 20, 1995
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Cited by:
  1. Zvi Safra & Uzi Segal, 2006. "Calibration Results for Non-Expected Utility Theories," Boston College Working Papers in Economics 645, Boston College Department of Economics.
  2. Heeho Kim, 2011. "Market Instability and Revision Error in Risk Premium," International Advances in Economic Research, Springer, vol. 17(2), pages 169-180, May.
  3. Safra, Zvi & Segal, Uzi, 2002. "On the Economic Meaning of Machina's Frechet Differentiability Assumption," Journal of Economic Theory, Elsevier, vol. 104(2), pages 450-461, June.
  4. Wurth, A.M., 2009. "Pricing and Hedging in Incomplete Financial Markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3444699, Tilburg University.

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