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Risk Aversion under Preference Uncertainty

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  • 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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