A property of preferences that causes an agent to prefer alternatives whose outcomes are relatively certain, even when the associated expected payoff is lower.
Questions tagged [risk-aversion]
61 questions
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How do I compute the relative risk aversion of Epstein-Zin preferences?
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\newcommand{\E}{\mathbb{E}}
$$
Preface
This question is related to this one about the elasticity of intertemporal substitution and this one about the definition of absolute risk aversion. (It's related to the second one insofar as the definition…
jmbejara
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Intuition behind risk premium
In Lecture 20 of MIT's Microeconomics course, a situation is proposed where a 50/50 bet will either result in losing \$100 or gaining \$125 with a starting wealth of \$100. It is stated that a person would be willing to insure themselves for \$43.75…
Nick
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9
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Does risk aversion cause diminishing marginal utility, or vice versa?
Let $A$ be the set of possible states of the world, or possible preferences a person could have. Let $G(A)$ be the set of "gambles" or "lotteries", i.e. the set of probability distributions over $A$. Then each person would have a preferred ordering…
Keshav Srinivasan
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7
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Why should the statistical value of life exist?
In areas such as insurance pricing and government policy analysis, it is often necessary to assign human life a monetary amount in order to compare it with other monetary amounts. So economists have a measure called the statistical value of life,…
Keshav Srinivasan
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6
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1 answer
Does vNM rationality depend on the good chosen?
The von Neumann-Morgenstern theorem states that, assuming a person's preferences under risk satisfy certain rationality axioms, then there exists a utility function u, the von Neumann utility function, such that the person will tend to maximize the…
Keshav Srinivasan
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6
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3 answers
Question about the Ellsberg Paradox in Expected Utility Theory
The von Neumann-Morgenstern theorem states that, assuming a person's preferences under risk satisfy certain rationality axioms, then there exists a utility function u, the von Neumann utility function, such that the person will tend to maximize the…
Keshav Srinivasan
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6
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1 answer
Why is the Marginal Utility of losses deminishing in Prospect Theory?
This is Kahneman's value-plot on prospect theory:
QUESTION: Why is the Marginal Utility of losses deminishing?
CONTEXT:
I fully understand that the Marginal Utility of gains deminishes: 100 dollar gains has less utility to me when I am rich than…
GambitSquared
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6
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2 answers
Empirical estimates of CRRA and CARA utility
I am working on macroeconomic model and I need to calibrate it.
I am looking primarily for a statistically-founded estimate for the
coefficient of relative risk aversion in the CRRA utility
function based on macroeconomic US data (but also for the…
Andrii Kapinos
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5
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2 answers
Can a risk-averse agent's Certainty Equivalent be lower than the lowest possible outcome of a gamble?
Suppose there is an agent who faces the following gamble g:
50\$ with probability 1/3
100\$ with probability 1/3
150\$ with probability 1/3
Clearly, the E[g] = 100\$. Since agent is risk averse, we would expect that U(E[g]) < U(CE) , where CE is…
Paul
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5
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What does it mean by saying someone is "effectively risk averse/loving"?
Recently I am reading a paper by Ortner & Chassang (2018) on corruption control. It is a nice paper to read, and the idea is kinda cool.
The game is as follows. There are 3 players, a principle, a monitor, and an agent. The agent can choose to…
Lin Jing
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5
votes
1 answer
Could anyone here be able to explain gambling addiction and its debt with Microeconomics theory?
I am a research master student in Cognitive and Clinical Neuroscience, with the specialization/track Neuroeconomics and have to come up with a master thesis subject soon. I was thinking about gambling addiction and had some ideas of first…
Kroko
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5
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1 answer
given someone's past investing history, is there a way to calculate his risk aversion?
given someone's past investing history, is there a way to calculate his risk aversion?
Say, we know this client's investment history for example his past return, is there a way to calculate his risk aversion and use this parameter to portfolio…
JOHN
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4
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2 answers
Risk Premium in the Expected Utility Theory
Consider an agent with utility function $u$, initial wealth $\omega$, and a random variable $x$. By definition of the risk premium $R$, we have
$$ Eu(w+x) = u(w+E(x)-R). $$
The classical derivation of the risk premium is as follows:
A Taylor series…
emeryville
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4
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What behaviour do different values of Relative Risk Aversion imply?
What behaviour does it imply that Relative Risk Aversion of consumption, say R(c) is less than 1, equal to 1 or greater than 1?
I am reading an article of Diamond & Dybvig (1983), about Bank Runs, Deposit Insurance and liquidity and they assume a…
jkrod
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4
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Portfolio choice problem of a CARA investor with n risky assets
Ok, I am working on a problem that consists of the following:
I am looking to solve the portfolio choice optimization problem (maximizing utility with a known utility function) in the case where all of the underlying random variables are…
user2034
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