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The Arrow-Pratt measure of risk aversion is the most commonly used measure of risk aversion. It analyzes the degree of risk aversion by analyzing the utility representation. The measure is named after two economists: Kenneth Arrow and John Pratt.
It is sometimes useful to quantify the degree of risk aversion. There are two important measures of risk aversion. The first one is absolute risk aversion: r ((A. x)=−u x )/u ( , which is also called Arrow-Pratt coefficient of absolute risk aversion. Note that u measures the concavity of the utility function, while u normalizes the concavity ...
The most common and frequently used measure of risk aversion are the Arrow-Pratt measures of absolute and relative risk-aversion. Named after John W. Pratt’s paper “Risk Aversion in the Small and in the Large”, 1964, and Kenneth Arrow ’s “The Theory of Risk Aversion”, 1965, these are the measures: Arrow-Pratt measure of absolute ...
One such measure is the Arrow–Pratt measure of absolute risk aversion (ARA), after the economists Kenneth Arrow and John W. Pratt, [5] [6] also known as the coefficient of absolute risk aversion, defined as = ″ ′ ()
Specifying Risk-Aversion through a Utility function. We seek a \valuation formula" for the amount we'd pay that: Increases one-to-one with the Mean of the outcome Decreases as the Variance of the outcome (i.e.. Risk) increases Decreases as our Personal Risk-Aversion increases.
Arrow-Pratt measure of relative risk aversion: Where x is the payoff of a given lottery and U(x) the utility derived from that payoff. In this LP we’ve started by seeing what the difference between risk and uncertainty is.
This note explains the classic Arrow-Pratt measure of risk aversion. The standard reference is Pratt (1964) and Arrow (1965). Consider an agent with expected utility function E[u(w)], where w is wealth and u : R++ ! R is a utility function with u0 > 0 (increasing) and u00 < 0 (concave).
