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The Generalised Extreme Value Distribution as Utility Function

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  • Denis Conniffe

    ()
    (Economics, National University of Ireland, Maynooth)

Abstract

The idea that probability distribution functions could provide appropriate mathematical forms for utility functions representing risk aversion is of respectable antiquity. But the relatively few examples that have appeared in the economics literature have displayed quite restrictive risk aversion properties. This paper examines the potential of the generalised extreme value (GEV) distribution as utility function, showing it possesses considerable flexibility as regards risk aversion properties, even in its single parameter form. The paper concludes that the GEV utility function is worth considering for applications in cases where parametric parsimony matters.

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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1780907.

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Date of creation: 2007
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Handle: RePEc:may:mayecw:n1780907

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  1. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
  2. Danyang Xie, 1999. "Power Risk Aversion Utility Functions," CEMA Working Papers 22, China Economics and Management Academy, Central University of Finance and Economics, revised Oct 2000.
  3. Sinn, Hans-Werner, 1985. "Psychophysical laws in risk theory," Munich Reprints in Economics 19903, University of Munich, Department of Economics.
  4. LiCalzi, Marco & Sorato, Annamaria, 2006. "The Pearson system of utility functions," European Journal of Operational Research, Elsevier, vol. 172(2), pages 560-573, July.
  5. H. M. Shefrin & Richard Thaler, 1977. "An Economic Theory of Self-Control," NBER Working Papers 0208, National Bureau of Economic Research, Inc.
  6. Marvin H. Berhold, 1973. "The Use of Distribution Functions to Represent Utility Functions," Management Science, INFORMS, vol. 19(7), pages 825-829, March.
  7. Gregory, Nathaniel, 1980. "Relative Wealth and Risk Taking: A Short Note on the Friedman-Savage Utility Function," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1226-30, December.
  8. Meyer, Jack, 2007. "Representing Risk Preferences in Expected Utility Based Decision Models," SCC-76 Meeting, March 15-17, 2007, Gulf Shores, Alabama 9380, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
  9. Caballe, Jordi & Pomansky, Alexey, 1996. "Mixed Risk Aversion," Journal of Economic Theory, Elsevier, vol. 71(2), pages 485-513, November.
  10. Manski, Charles F, 2001. " Daniel McFadden and the Econometric Analysis of Discrete Choice," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(2), pages 217-29, June.
  11. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  12. Meyer, Donald J. & Meyer, Jack, 2005. "Risk preferences in multi-period consumption models, the equity premium puzzle, and habit formation utility," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1497-1515, November.
  13. Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
  14. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
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Cited by:
  1. Meyer, Jack, 2007. "Representing Risk Preferences in Expected Utility Based Decision Models," SCC-76 Meeting, March 15-17, 2007, Gulf Shores, Alabama 9380, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.

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