An Economic Index of Riskiness

Robert J. Aumann and Roberto Serrano ()

Discussion Paper Series from Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem

Abstract: Define the riskiness of a gamble as the reciprocal of the absolute risk aversion (ARA) of an individual with constant ARA who is indifferent between taking and not taking that gamble. We characterize this index by axioms, chief among them a "duality" axiom which, roughly speaking, asserts that less risk-averse individuals accept riskier gambles. The index is homogeneous of degree 1, monotonic with respect to first and second order stochastic dominance, and for gambles with normal distributions, is half of variance/mean. Examples are calculated, additional properties derived, and the index is compared with others in the literature.

Keywords: Riskiness; Risk Aversion; Expected Utility; Decision Making under Uncertainty; Portfolio Choice; Sharpe Ratio; Variance-Mean Ratio; Value at Risk (search for similar items in EconPapers)
JEL-codes: C00 C43 D00 D80 D81 E44 G00 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg and nep-upt
Date: Written
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Related works:
Working Paper: An Economic Index of Riskiness (2007)
Working Paper: An Economic Index of Riskiness (2006)
Working Paper: An economic index of riskiness (2007)
Working Paper: AN ECONOMIC INDEX OF RISKINESS (2007)
Working Paper: An Economic Index of Riskiness (2006)
Journal Article: An Economic Index of Riskiness (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:huj:dispap:dp446

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