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Risk Aversion under Preference Uncertainty

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Author Info

  • Roman Kraeussl

    (VU University Amsterdam)

  • Andre Lucas

    (VU University Amsterdam)

  • Arjen Siegmann

    (VU University Amsterdam)

Abstract

We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-117/2/DSF 4.

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Date of creation: 29 Nov 2010
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Handle: RePEc:dgr:uvatin:20100117

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Web page: http://www.tinbergen.nl

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Keywords: risk aversion; preference uncertainty; risk-taking; asset allocation;

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  16. Gregory W. Fischer & Mary Frances Luce & Jianmin Jia, 2000. "Attribute Conflict and Preference Uncertainty: Effects on Judgment Time and Error," Management Science, INFORMS, vol. 46(1), pages 88-103, January.
  17. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
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  19. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Lost In State Space: Are Preferences Stable?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(3), pages 1091-1112, 08.
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