Risk aversion as risk-neutral pessimism: A simple proof

J.B. Heaton

International Review of Law and Economics, 2018, vol. 56, issue C, 70-72

Abstract: It has long been understood that risk aversion reduces the likelihood of suit. This article offers a simple proof that risk aversion is observationally equivalent to risk-neutral pessimism by applying a change of measure to risk-neutral probabilities. The observational equivalence of risk aversion to risk-neutral pessimism may provide a useful framework for proving results in the study of several areas of interest, including (1) the role of risk-transfer mechanisms like contingency fees and litigation funding; (2) calls for prohibitions on, or judicial participation in, plea bargains; and (3) broader judicial review of the fairness, reasonableness, and adequacy of settlements in individual (that is, non-class) civil actions.

Keywords: Economic analysis of litigation; Risk aversion; Risk neutral probabilities; Pessimism; Criminal law; Plea bargains; Settlement (search for similar items in EconPapers)
JEL-codes: C65 D84 D91 K14 K15 K41 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:56:y:2018:i:c:p:70-72

DOI: 10.1016/j.irle.2018.07.002

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