The risk premium and the effects of risk on utility

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The risk premium and the effects of risk on utility

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M. Menegatti ()

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Mario Menegatti

Abstract

This work shows that the risk premium can be a mistaken measure of the reduction in utility caused by uncertainty since, when different level of wealth are considered, the relative size of the former is related to that of the latter only in some cases. The analysis indicates that this is because the size of the risk premium depends both on the size of the disutility of risk and on the size of the marginal utility of money. Some simple economic problems where this conclusion is relevant are also examined.

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Publisher Info
Paper provided by Department of Economics, Parma University (Italy) in its series Economics Department Working Papers with number 2007-EP10.

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Length: 10 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:par:dipeco:2007-ep10

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Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-01-26 (All new papers)
NEP-UPT-2008-01-26 (Utility Models & Prospect Theory)

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This page was last updated on 2009-11-17.

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