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.
|Date of creation:||28 Feb 2007|
|Date of revision:|
|Publication status:||Published in Journal of Political Economy 116(5), October 2008: 810-836|
|Contact details of provider:|| Postal: Veláquez 76, 28001 Madrid|
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"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.
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