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Stochastic dominance and absolute risk aversion

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  • Jordi Caballé
  • Joan Esteban

Abstract

In this paper we proose the infimum of the Arrow-Pratt index of absolute risk aversion as a measure of global risk aversion of a utility function. We then show that, for any given arbitrary pair of distributions, there exists a threshold level of global risk aversion such that all increasing concave utility functions with at least as much global risk aversion would rank the two distributions in the same way. Furthermore, this threshold level is sharp in the sense that, for any lower level of global risk aversion, we can find two utility functions in this class yielding opposite preference relations for the two distributions.

Suggested Citation

  • Jordi Caballé & Joan Esteban, 2002. "Stochastic dominance and absolute risk aversion," Economics Working Papers 643, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:643
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    References listed on IDEAS

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    1. Alain Chateauneuf & Michéle Cohen & Isaac Meilijson, 2005. "More pessimism than greediness: a characterization of monotone risk aversion in the rank-dependent expected utility model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(3), pages 649-667, April.
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    Cited by:

    1. Christian Gollier & Miles S. Kimball, 2018. "New methods in the classical economics of uncertainty: comparing risks," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 5-23, May.
    2. Eisenhauer, Joseph G., 2006. "Risk aversion and prudence in the large," Research in Economics, Elsevier, vol. 60(4), pages 179-187, December.
    3. Eisenhauer, Joseph G., 2010. "Rank-ordering of risk preferences with conventional and discrete measures," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 291-297, August.

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    More about this item

    Keywords

    Risk aversion; stochastic dominance;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D30 - Microeconomics - - Distribution - - - General

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