Risk attitudes and the value of risk transformations
(2012) , 11 pages
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- Authors
- Abstract
- An increase in risk aversion, defined by a concavification of the utility function, does not always increase the willingness-to-pay for a mean preserving reduction in risk. This is why Ross (1981) proposed a stronger measure of increased risk aversion that maintains for mean preserving changes in risk the result obtained by Arrow (1965) and Pratt (1964) for risk elimination. Ross (1981)'s contribution was later on extended to higher orders using Ekern (1980)'s notion of a higher degree increase in risk. In this paper, we show that these measures remain valid under less restrictive assumptions than those implied by Ekern (1980)'s approach and we refer to the concept of mean preserving stochastic dominance. Finally, we also extend the analysis conducted for the willingness-to-pay to the willingness-to-accept.
- Affiliations
LEM, Lille, France IESEG School of Management
Citations
Denuit, M., & Eeckhoudt, L. (2012). Risk attitudes and the value of risk transformations (ISBA Discussion Paper 2012/07). https://hdl.handle.net/2078.5/208564