Stochastic Dominance and Absolute Risk Aversion
AbstractIn this paper we propose the infimum of the Arrow-Pratt index of absolute risk aversion as a measure of global risk aversion of a utility function. We then show that, for any given arbitrary pair of distributions, there exists a threshold level of global risk aversion such that all increasing concave utility functions with at least as much global risk aversion would rank the two distributions in the same way. Furthermore, this threshold level is sharp in the sense that, for any lower level of global risk aversion, we can find two utility functions in this class yielding opposite preference relations for the two distributions.
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Bibliographic InfoPaper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 506.02.
Date of creation: 04 Apr 2002
Date of revision:
Risk aversion; Stochastic Dominance; Thriftiness;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D30 - Microeconomics - - Distribution - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-04-15 (All new papers)
- NEP-IAS-2002-04-15 (Insurance Economics)
- NEP-LTV-2002-04-03 (Unemployment, Inequality & Poverty)
- NEP-MIC-2002-04-15 (Microeconomics)
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