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Risk Aversion in the Small and in the Large under Rank-Dependent Utility

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  • Louis R. Eeckhoudt
  • Roger J. A. Laeven

Abstract

Under expected utility the local index of absolute risk aversion has played a central role in many applications. Besides, its link with the "global" concepts of the risk and probability premia has reinforced its attractiveness. This paper shows that, with an appropriate approach, similar developments can be achieved in the framework of Yaari's dual theory and, more generally, under rank-dependent utility.

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  • Louis R. Eeckhoudt & Roger J. A. Laeven, 2015. "Risk Aversion in the Small and in the Large under Rank-Dependent Utility," Papers 1512.08037, arXiv.org.
    • Handle: RePEc:arx:papers:1512.08037
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    References listed on IDEAS

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    1. Ulrich Schmidt & Horst Zank, 2008. "Risk Aversion in Cumulative Prospect Theory," Management Science, INFORMS, vol. 54(1), pages 208-216, January.
    2. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    3. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    4. Hong, Chew Soo & Karni, Edi & Safra, Zvi, 1987. "Risk aversion in the theory of expected utility with rank dependent probabilities," Journal of Economic Theory, Elsevier, vol. 42(2), pages 370-381, August.
    5. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    6. Chateauneuf, Alain & Cohen, Michele & Meilijson, Isaac, 2004. "Four notions of mean-preserving increase in risk, risk attitudes and applications to the rank-dependent expected utility model," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 547-571, August.
    7. Ryan, Matthew J., 2006. "Risk aversion in RDEU," Journal of Mathematical Economics, Elsevier, vol. 42(6), pages 675-697, September.
    8. Eeckhoudt, Louis R. & Laeven, Roger J.A., 2015. "The probability premium: A graphical representation," Economics Letters, Elsevier, vol. 136(C), pages 39-41.
    9. Liu, Liqun & Meyer, Jack, 2013. "Substituting one risk increase for another: A method for measuring risk aversion," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2706-2718.
    10. Jindapon, Paan, 2010. "Prudence probability premium," Economics Letters, Elsevier, vol. 109(1), pages 34-37, October.
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    Cited by:

    1. Brice Corgnet & Roberto Hernan-Gonzalez & Yao Thibaut Kpegli & Adam Zylbersztejn, 2023. "Against the Odds! The Tradeoff Between Risk and Incentives is Alive and Well," Working Papers 2305, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

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