Risk Aversion in the Not-So-Small: Beyond Mean and Variance

George Szpiro

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: The Pratt-Arrow coefficient of risk aversion, r(w), describes decision behavior of individuals under uncertainty, when small amounts of money are involved. In this paper a two-parameter measure is proposed which also takes into account the utility function’s third derivative: by thus incorporating a risk’s skewness, one receives a better approximation for amounts which are not necessarily very small.

The model provides new theoretical results and also predicts unexpected behavior under certain conditions; this permits the model’s empirical verification.

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Persistent link: https://EconPapers.repec.org/RePEc:fth:pennfi:21-86

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