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A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility


  • Robert F. Nau

    () (Fuqua School of Business, Duke University, Durham, North Carolina 27708-0120)


The Pratt-Arrow measure of local risk aversion is generalized for the n-dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility preferences. Local risk aversion is measured by the matrix of derivatives of the decision maker's risk-neutral probabilities, without reference to true subjective probabilities or riskless wealth positions, and comparative risk aversion is measured without requiring agreement on true probabilities. Risk-neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims.

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  • Robert F. Nau, 2003. "A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility," Management Science, INFORMS, vol. 49(8), pages 1089-1104, August.
  • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:8:p:1089-1104

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    Cited by:

    1. Hurley, Terrance M., 2016. "Slutsky, Let Me Introduce You to Arrow-Pratt: Competitive Price Effects with Uncertain Production," Staff Papers 250204, University of Minnesota, Department of Applied Economics.
    2. Robert Nau, 2015. "Risk-neutral equilibria of noncooperative games," Theory and Decision, Springer, vol. 78(2), pages 171-188, February.
    3. Louis R. Eeckhoudt & Roger J. A. Laeven, 2016. "Dual Moments and Risk Attitudes," Papers 1612.03347,, revised Mar 2018.
    4. André, Eric, 2014. "Optimal portfolio with vector expected utility," Mathematical Social Sciences, Elsevier, vol. 69(C), pages 50-62.
    5. repec:pal:jorsoc:v:57:y:2006:i:3:d:10.1057_palgrave.jors.2601982 is not listed on IDEAS
    6. Elisa Pagani, 2015. "Certainty Equivalent: Many Meanings of a Mean," Working Papers 24/2015, University of Verona, Department of Economics.
    7. Costis Skiadas, 2015. "Dynamic choice with constant source-dependent relative risk aversion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(3), pages 393-422, November.
    8. repec:kap:theord:v:83:y:2017:i:1:d:10.1007_s11238-016-9584-6 is not listed on IDEAS


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