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Discrete Arrow–Pratt indexes for risk and uncertainty

Author

Listed:
  • Aurélien Baillon

    (Erasmus University Rotterdam)

  • Olivier L’Haridon

    (Université de Rennes 1, Univ Rennes)

Abstract

The Arrow–Pratt index, a gold standard in studies of risk attitudes, is not directly observable from choice data. Existing methods to measure it rely on parametric assumptions. We introduce a discrete Arrow–Pratt index, and its relative counterpart, that can be directly obtained from choices. Our approach is general: it is (i) non-parametric, (ii) applicable to both risk and uncertainty, (iii) and robust to probability transformation, non-additive beliefs and multiple priors. Our index can also be used to characterize various decision models through various simple consistency requirements. We analyze its properties and demonstrate how it can be measured.

Suggested Citation

  • Aurélien Baillon & Olivier L’Haridon, 2021. "Discrete Arrow–Pratt indexes for risk and uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(4), pages 1375-1393, November.
    • Handle: RePEc:spr:joecth:v:72:y:2021:i:4:d:10.1007_s00199-020-01315-8
    DOI: 10.1007/s00199-020-01315-8
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    More about this item

    Keywords

    Risk aversion; Arrow–Pratt index; CARA; CRRA; Preference foundation;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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