A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility

Robert F. Nau ()
Additional contact information
Robert F. Nau: Fuqua School of Business, Duke University, Durham, North Carolina 27708-0120

Management Science, 2003, vol. 49, issue 8, 1089-1104

Abstract: The Pratt-Arrow measure of local risk aversion is generalized for the n-dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility preferences. Local risk aversion is measured by the matrix of derivatives of the decision maker's risk-neutral probabilities, without reference to true subjective probabilities or riskless wealth positions, and comparative risk aversion is measured without requiring agreement on true probabilities. Risk-neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims.

Keywords: Criteria for Decision Making Under Risk and Uncertainty; Risk Aversion; Uncertainty Aversion; Expected-Utility Theory; Nonexpected-Utility; Smooth Preferences (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.49.8.1089.16398 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:49:y:2003:i:8:p:1089-1104

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().