An Economic Index of Riskiness
Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a "duality" axiom which, roughly speaking, asserts that less risk-averse individuals accept riskier gambles. The index is homogeneous of degree 1, monotonic with respect to first and second order stochastic dominance, and for gambles with normal distributions, is half of variance/mean. Examples are calculated, additional properties derived, and the index is compared with others in the literature.
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- Palacios-Huerta, Ignacio & Serrano, Roberto, 2006.
"Rejecting small gambles under expected utility,"
Elsevier, vol. 91(2), pages 250-259, May.
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- Matthew Rabin, 2001.
"Risk Aversion and Expected Utility Theory: A Calibration Theorem,"
Levine's Working Paper Archive
7667, David K. Levine.
- Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
- Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley.
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