One theory for two different risk premia

Emmanuelle Gabillon ()

Economics Letters, 2012, vol. 116, issue 2, 157-160

Abstract: Generally, in the standard presentation of the expected utility model, the risk premium represents how much a risk-averse decision maker is ready to pay to have a risk eliminated. Here, however, we introduce a different risk premium: how much should a risk (which could be the return on a financial asset) yield to be acceptable to a risk-averse decision maker. Although our risk premium is derived from the Pratt bid price, it should not be confused with it: the Pratt bid price represents the monetary compensation of a risk. The standard risk premium refers to risk-avoidance; our risk premium, however, refers to risk-taking. We then reanalyze the main results concerning risk aversion under expected utility using this risk premium tool and deduce its main properties.

Keywords: Choices under uncertainty; Expected utility; Risk aversion; Risk premium (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:116:y:2012:i:2:p:157-160

DOI: 10.1016/j.econlet.2012.02.024

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