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Dual Approaches To The Analysis Of Risk Aversion

  • Chambers, Robert G.
  • Quiggin, John C.

We present a dual formulation of choice under uncertainty based on a few simple assumptions about preferences. It is shown that the additive separability restriction on preferences, key to expected-utility theory, can be dropped with little loss of analytic power for a broad class of choice problems. Dual risk premiums are characterized, and it is shown that placing various invariance restrictions on them leads naturally to generalizations of the concepts of CARA, CRRA, and LRT familiar from expected-utility theory. Each of these generalizations conforms to a notion of homotheticity. Copyright (c) The London School of Economics and Political Science 2006.

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File URL: http://purl.umn.edu/28606
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Paper provided by University of Maryland, Department of Agricultural and Resource Economics in its series Working Papers with number 28606.

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Date of creation: 2002
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Handle: RePEc:ags:umdrwp:28606
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  1. Blackorby, Charles & Donaldson, David, 1980. "A Theoretical Treatment of Indices of Absolute Inequality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 107-36, February.
  2. Uzi Segal & Avia Spivak, 1988. "First Order Versus Second Order Risk Aversion," UCLA Economics Working Papers 540, UCLA Department of Economics.
  3. Thibault Gadjos & Jean-Marc Tallon & Jean-Christophe Vergnaud, 2002. "Decision Making with Imprecise Probabilistic Information," Working Papers 2002-33, Centre de Recherche en Economie et Statistique.
  4. Lewbel, Arthur, 1991. "The Rank of Demand Systems: Theory and Nonparametric Estimation," Econometrica, Econometric Society, vol. 59(3), pages 711-30, May.
  5. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
  6. Chambers, Robert G. & Chung, Yangho & Fare, Rolf, 1996. "Benefit and Distance Functions," Journal of Economic Theory, Elsevier, vol. 70(2), pages 407-419, August.
  7. Epstein, Larry G. & Zin, Stanley E., 1990. "'First-order' risk aversion and the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 387-407, December.
  8. Quiggin, John & Chambers, Robert G, 1998. "Risk Premiums and Benefit Measures for Generalized-Expected-Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 121-37, November.
  9. Machina, Mark J, 2001. "Payoff Kinks in Preferences over Lotteries," Journal of Risk and Uncertainty, Springer, vol. 23(3), pages 207-60, November.
  10. Luenberger, David G., 1992. "Benefit functions and duality," Journal of Mathematical Economics, Elsevier, vol. 21(5), pages 461-481.
  11. Milgrom, Paul, 1994. "Comparing Optima: Do Simplifying Assumptions Affect Conclusions?," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 607-15, June.
  12. Lwebel Arthur & Perraudin William, 1995. "A Theorem on Portfolio Separation with General Preferences," Journal of Economic Theory, Elsevier, vol. 65(2), pages 624-626, April.
  13. Peleg, Bezalel, 1975. "Efficient random variables," Journal of Mathematical Economics, Elsevier, vol. 2(2), pages 243-252.
  14. Safra, Zvi & Segal, Uzi, 1998. "Constant Risk Aversion," Journal of Economic Theory, Elsevier, vol. 83(1), pages 19-42, November.
  15. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  16. Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
  17. Feder, Gershon, 1977. "The impact of uncertainty in a class of objective functions," Journal of Economic Theory, Elsevier, vol. 16(2), pages 504-512, December.
  18. Frank Milne, 1979. "Consumer Preferences, Linear Demand Functions and Aggregation in Competitive Asset Markets," Review of Economic Studies, Oxford University Press, vol. 46(3), pages 407-417.
  19. Robert G. Chambers & Rolf Färe, 1998. "Translation homotheticity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 629-641.
  20. Brennan, M. J. & Kraus, A., 1976. "The Geometry of Separation and Myopia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(02), pages 171-193, June.
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