On Risk Aversion, Classical Demand Theory, and KM Preferences

Leonard Mirman and Marc Santugini

Cahiers de recherche from CIRPEE

Abstract: Building on Kihlstrom and Mirman (1974)’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer’s maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision.

Keywords: Classical Demand Theory; Consumer Choice; Income and Substition Effects; Risk Aversion (search for similar items in EconPapers)
JEL-codes: D01 D81 D91 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-hpe, nep-mic and nep-upt
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Citations: View citations in EconPapers (1)

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Journal Article: On risk aversion, classical demand theory, and KM preferences (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1132

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