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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.
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 ...
This note explains the classic Arrow-Pratt measure of risk aversion. The standard reference is Pratt (1964) and Arrow (1965). 1 Measures of risk aversion. 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).
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 as the utility representation is unique up to affine transformations. A convenient ...
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.
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-
An agent is risk-averse if, at any wealth level w, he or she dislikes every lottery with an expected payoff of zero: ∀ w , ∀˜ z with E ˜z = 0, Eu(w +˜ z) u(w) .
