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One Theory For Two Risk Premia


  • Emmanuelle GABILLON (GREThA, CNRS, UMR 5113)


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 (GREThA, CNRS, UMR 5113), 2011. "One Theory For Two Risk Premia," Cahiers du GREThA 2011-39, Groupe de Recherche en Economie Théorique et Appliquée.
  • Handle: RePEc:grt:wpegrt:2011-39

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    References listed on IDEAS

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


    choices under uncertainty; expected utility; risk aversion; risk premium.;

    JEL classification:

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

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