9 votes
Accepted

given someone's past investing history, is there a way to calculate his risk aversion?

Generally speaking no. You wouldn't be able to distinguish re-balancing for risk aversion reasons from re-balancing motivated by changes in expected returns or the co-variance of returns. Consider ...
BKay's user avatar
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6 votes

a risk lover agent preferences and the preference of risk natural agent may be the same

Don't commit the cardinal mistake of equating preferences with choices. In the context of Expected Utility Theory, the fact that a risk-averse agent ($RA$) would choose $N$ over $M$ implies that $...
Alecos Papadopoulos's user avatar
5 votes
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Why is the risk premium always positive for risk averse individuals?

Suppose that the vector $W=\left(w_1,w_2,\dots,w_n\right)$ represents wealth in $n$ possible states. In addition, assume the probability of each state occurring is represented by the vector $\pi=\left(...
lunar_props's user avatar
4 votes

Does decreasing marginal utility imply risk aversion?

What you are misunderstanding, is that in expected utility theory, marginal utility is not an independent concept from "risk aversion", as the latter is defined in the context of that theory: "risk ...
Alecos Papadopoulos's user avatar
4 votes
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Is DARA utility implying CRRA most of the time?

Using the results derived in this answer we have the following relations for any utility function: (Absolute Risk Aversion = $A(c)$, Relative Risk Aversion = $R(c)$) : $$A(c) = -\frac {u''(c)}{u'(c)...
Alecos Papadopoulos's user avatar
4 votes

Is DARA utility implying CRRA most of the time?

Let me turn my comment into a quick answer: Using the notation of the article you quoted $A(c)$ is the absolute risk aversion and $c A(c)$ the relative risk aversion. If $A(c)$ is decreasing, the ...
HRSE's user avatar
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4 votes

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 ...
Michael Greinecker's user avatar
4 votes

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 ...
Herr K.'s user avatar
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4 votes
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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 ...
1muflon1's user avatar
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4 votes
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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 ...
EconJohn's user avatar
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3 votes
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Construct utility function for a risk-averse agent

If $-|x-a|$ represents the monetary payoff associated with the policy choice $a$, then $u(a) =-\left(|x-a|^\gamma\right)$ is risk averse for $\gamma > 1$, and risk loving for $0<\gamma < 1$.
Amit's user avatar
  • 8,466
3 votes

Risk neutral probability for each of 3 states

I cannot really follow your formulas, what is the logic behind them? Seems to me there is no way to divine three state risk-neutral probabilities from 1 financial instrument's prices. The equation $$ ...
Giskard's user avatar
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3 votes
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a risk lover agent preferences and the preference of risk natural agent may be the same

Another way of looking at this problem is to consider the means and variances of the lotteries. A risk averse agent (RA) likes high mean and low variance A risk neutral agent (RN) likes high mean ...
Herr K.'s user avatar
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3 votes
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Entrepreneurs and risk aversion

Interestingly—and much in contrast to recent research—our data supports the conventional wisdom that persons with a higher inclination towards risk have a significantly higher probability of becoming ...
Giskard's user avatar
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3 votes
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von-Neumann-Morgenstern v. Bernoulli Utility Function

Bernoulli utility represents preference over monetary outcomes. In a way, this is no different from the typical utility functions defined over consumption bundles. vNM utility, in contrast, ...
Herr K.'s user avatar
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3 votes

Negative expected value; risk neutral choice

There are three type of individuals : risk averse, risk neutral and risk loving. Individuals evaluate risky prospects such as to maximize the expected level of their utility. So, an agent is risk ...
ARandomUser's user avatar
3 votes

Why should the statistical value of life exist?

You asked: why should there exist a single value of $X$ that satisfies this definition for all values of $p$, or even all values of $p$ that are sufficiently close to $0$ There isn't such a value....
410 gone's user avatar
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3 votes
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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 ...
H Rogers's user avatar
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3 votes
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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 ...
Bayesian's user avatar
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3 votes

Negative certainty equivalent

I mispoke in the comments, this certainty equivalent should indeed not be negative. The certainty equivalent in your example is $w_0+c$, this certain payoff's utility is equivalent with the lottery's....
Giskard's user avatar
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3 votes
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Constant relative risk aversion for wealth spanning from negative to positive

I'm afraid the answer is no. Let's take any continuous and strictly increasing utility function $U(W)$ which is twice differentiable almost everywhere on the reals. Constant relative risk aversion (...
VARulle's user avatar
  • 6,805
3 votes

Deriving the constant relative risk aversion utility function

This is just a consequence of the (here tacit) assumption that $u'>0$.
VARulle's user avatar
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3 votes
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Risk aversion and utility transformation: are preferences still the same?

It depends on what you consider the individuals' "consumption space". Both individuals have the same preferences over monetary prizes: They prefer more money to less money. These preferences ...
VARulle's user avatar
  • 6,805
2 votes

Does decreasing marginal utility imply risk aversion?

This answer is closely related to the points raised by @Fix.B. and @AlecosPapadopoulos, which must be upvoted. But because @user1559897 still asks the question ''what sense does it make under the ...
emeryville's user avatar
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2 votes

Does decreasing marginal utility imply risk aversion?

Its one of those cases where math is clearer that words I think: Yes, the definition of an agent with utility function $U(C)$ being risk averse is that $E[U(C)]<U(E[C])$ but this is true iff $U''(...
Fix.B.'s user avatar
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2 votes

given someone's past investing history, is there a way to calculate his risk aversion?

adding to the previous answer, i found this paper here where the authors just did that. They controlled for other effects and the shape of the utility function so i guess its possible.. https://papers....
T123's user avatar
  • 303
2 votes

Is car accident/theft a fair bet?

You are confused about how insurance works, and thereby why people take insurance. When someone buys insurance against a certain even, s/he has to pay a fee (called a "premium"), which entitles the ...
luchonacho's user avatar
  • 8,591
2 votes

CARA Coefficient Calculation

Implementing the "affine transformation", let $$u(x) = A-B\exp\{-\lambda x\}$$ Then we want to solve $(x_1 = 2400, x_2 = 5000)$ $$A-B\exp\{-\lambda x_1\} = \frac 12 \Big[A-B\exp\{-\lambda x_2\}\Big]+...
Alecos Papadopoulos's user avatar
2 votes
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) ...
Amit's user avatar
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