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• 436

Is there a natural intuitive interpretation of the **numerical value** of the coefficients of risk aversion?

Yes, there is such an interpretation in Section 3 of the original paper by Pratt: Pratt, J. (1964). Risk Aversion in the Small and in the Large. Econometrica, 32(1/2), 122-136. Under some ...
• 13.4k

Why is the Marginal Utility of losses diminishing in Prospect Theory?

The value function used in Kahneman's prospect theory (which your plot shows) is supposed to capture empirically observed behavior of people's attitudes towards gains/losses as well as to risks in ...
• 15.6k
Accepted

Examples of risk-neutral firms or people in business

Its very hard to give an actual real world example of risk neutral person (firms are just run by people only people can have attitudes to risk) not because they do not exist but because research on ...
• 57.4k
Accepted

What is the economic intuition of prudence in the static case?

Prudence has to do with the response of how additional dimensions of uncertainty impacts the preference or aversion to that uncertainty. To illustrate, prudence (the sign of $u'''(\cdot)$) impacts the ...
• 8,397
Accepted

Can we model risk with only probability?

I don't think it even makes sense to talk about risk without specifying the payoffs. Take your two examplary gambles and suppose that $a=b=c=d=e=0$. In that case, there is no risk involved at all. It ...
• 5,291
Accepted

What does it mean by saying someone is "effectively risk averse/loving"?

"Effectively" has two definitions: 1: in such a manner as to achieve a desired result. 2: actually but not officially or explicitly. O+C are using the second definition here. This is because the ...
• 638

• 33.9k
Accepted

How is the utility function with constant relative risk-aversion obtained?

In the slide, we're given the marginal utility (or the derivative of the utility function) as $m(x) = x^{-b}$. The utility function whose derivative is $m(x)$ is \begin{eqnarray*} u(x) = \int m(x) ...
• 9,236
Accepted

Constant absolute risk aversion and certainty equivalent

This is perhaps not the best way to prove the statement. But notice that a CARA utility is equivalent to having the general functional form: u(x)=-\alpha \mathrm e^{-ax-b}+\beta,\quad\...
• 15.6k
Accepted

Diminishing mariginal utility and risk preferences

Mas-Colell, Whinston, and Green Proposition 6.C.1 (p. 187) says that for an expected utility maximizer with a Bernoulli utility function $u(\cdot)$ on amounts of money, saying that "the decision maker ...
• 16.3k

Could anyone here be able to explain gambling addiction and its debt with Microeconomics theory?

It seems to me that the topic is related to rational addiction: Individual preferences for consuming $x_t$ are conditioned by their past consumption $x_{t-1}$. See for instance: Becker, G., and ...
• 3,371

Why does a risk-return relationship that has historically been positive confirm risk averse investors?

Risk aversion measures the degree to which someone prefers a sure thing to a gamble. If people are risk-averse that means they would, all else equal, prefer sure return to risky return, even if the ...
• 1,849

Why does a risk-return relationship that has historically been positive confirm risk averse investors?

You can think about it from different viewpoints. All answers are true. I'll just try to explain it from another angle. We are on the same page that everybody loves higher returns. The question is ...
• 101

risk aversion and the law of diminishing marginal utility

Risk aversion means that, when faced with a risky alternative and a sure alternative whose value is equal to the expected value of the risky one, the sure alternative is weakly preferred to the risky ...
• 15.6k

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