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One Theory For Two Risk Premia

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  • Emmanuelle GABILLON

Abstract

Generally, in the standard presentation of the expected utility model, the risk premium represents how much a risk-averse decision maker is ready to pay to have a risk eliminated. Here, however, we introduce a different risk premium: how much should a risk (which could be the return on a financial asset) yield to be acceptable to a risk-averse decision maker. Although our risk premium is derived from the Pratt bid price, it should not be confused with it: the Pratt bid price represents the monetary compensation of a risk. The standard risk premium refers to risk-avoidance; our risk premium, however, refers to risk-taking. We then reanalyse the main results concerning risk aversion under expected utility using this risk premium tool and deduce its main properties.

Suggested Citation

  • Emmanuelle GABILLON, 2011. "One Theory For Two Risk Premia," Cahiers du GREThA (2007-2019) 2011-39, Groupe de Recherche en Economie Théorique et Appliquée (GREThA).
    • Handle: RePEc:grt:wpegrt:2011-39
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    File URL: http://cahiersdugretha.u-bordeaux.fr/2011/2011-39.pdf
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    References listed on IDEAS

    as
    1. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
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    More about this item

    Keywords

    choices under uncertainty; expected utility; risk aversion; risk premium.;
    All these keywords.

    JEL classification:

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

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