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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.
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Kenneth Joseph Arrow, born in 1921, is an American economist...
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John von Neumann 1903-1957, was a Hungarian-born American...
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- Uncertainty
Key words: marginal utility, risk aversion, scale transformations, stochastic dominances. The Pratt-Arrow absolute risk aversion coef-ficient (Pratt), defined as r(x) = -u''x)/u'x' has been used in many analyses which order alternative action choices under conditions of uncertainty (Cochran, Robison, and Lodwick; Cochran et al.; Danok, McCarl ...
1 Ιαν 2014 · Arrow and Pratt present definitions and measures of risk aversion, while Rothschild and Stiglitz define increases in risk and mean preserving spreads to replace the use of variance as a measure of risk.
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.
The Arrow–Pratt index of relative risk aversion combines the important economic concepts of elasticity and marginal utility. The index is used by many authors writing in relation to utility theory.
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:
This paper analyzes two issues: (a) the effect of decision-weights on risk premium, and (b) whether risk-aversion characterizes most investors. We theoretically show that cumulative prospect theory decision-weights systemati-
