Standard Risk Aversion / Miles S. Kimball.

Format:

Book

Author/Creator:

Kimball, Miles S.

Contributor:

National Bureau of Economic Research.

Series:

Technical Working Paper Series (National Bureau of Economic Research) no. t0099.

NBER technical working paper series no. t0099

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1991.

Summary:

This paper introduces the concept of standard risk aversion. A von Neumann-Morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful (in the sense of an increased reduction in expected utility) also makes any undesirable, independent risk more painful. It is shown that, given monotonicity and concavity, the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion. Standard risk aversion is shown to imply not only Pratt and Zeckhauser's 'proper risk aversion" (individually undesirable, independent risks always being jointly undesirable) , but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return. Similar results are established for the effect of broad class of increases in one risk on the desirability of (or optimal investment in) a second, independent risk.

Notes:

Print version record

March 1991.