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Measures of Risk Aversion with Expected and Nonexpected Utility

  • Montesano, Aldo

In the expected utility case, the risk-aversion measure is given by the Arrow-Pratt index. Three proposals of a risk-aversion measure for the nonexpected utility case are examined. The first one sets "the second derivative of the acceptance frontier as a measure of local risk aversion." The second one takes into account the concavity in the consequences of the partial derivatives of the preference function with respect to probabilities. The third one measures risk aversion through the ratio between the risk premium and the standard deviation of the lottery. The third proposal catches the main feature ofrisk aversion, while the other two proposals are not always in accordance with the same crude definition of risk aversion, by which there is risk aversion when an agent prefers to get the expected value of a lottery rather than to participate in it. Copyright 1991 by Kluwer Academic Publishers

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Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 4 (1991)
Issue (Month): 3 (July)
Pages: 271-83

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Handle: RePEc:kap:jrisku:v:4:y:1991:i:3:p:271-83
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100299

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