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Comparative higher-order risk aversion and higher-order prudence

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  • Wong, Kit Pong

Abstract

In this paper, we define the nth-degree utility premium as the pain associated with facing the passage from a more favorable risk to a less favorable risk, where the risk increase is specified by the notion of more nth-degree risk. We further define the nth-degree prudence utility premium as the increase in pain when the individual suffers a sure loss. We show that the nth-degree utility premium, normalized by the (n−1)th derivative of the utility function evaluated at the initial wealth, can explain comparative risk aversion of higher orders. On the other hand, the nth-degree prudence utility premium, normalized by the nth derivative of the utility function evaluated at the initial wealth, can explain comparative prudence of higher orders.

Suggested Citation

  • Wong, Kit Pong, 2018. "Comparative higher-order risk aversion and higher-order prudence," Economics Letters, Elsevier, vol. 169(C), pages 38-42.
    • Handle: RePEc:eee:ecolet:v:169:y:2018:i:c:p:38-42
    DOI: 10.1016/j.econlet.2018.05.005
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    Cited by:

    1. Heinzel, Christoph, 2023. "Comparing utility derivative premia under additive and multiplicative risks," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 23-40.
    2. Wong, Kit Pong, 2022. "Diversification and risk attitudes toward two risks," Journal of Mathematical Economics, Elsevier, vol. 102(C).
    3. Kit Pong Wong, 2019. "An interpretation of the condition for precautionary saving: the case of greater higher-order interest rate risk," Journal of Economics, Springer, vol. 126(3), pages 275-286, April.

    More about this item

    Keywords

    Comparative prudence; Comparative risk aversion; Prudence utility premium; Utility premium;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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