Comparative higher-order risk aversion and higher-order prudence

Kit Pong Wong

Economics Letters, 2018, vol. 169, issue C, 38-42

Abstract: In this paper, we define the nth-degree utility premium as the pain associated with facing the passage from a more favorable risk to a less favorable risk, where the risk increase is specified by the notion of more nth-degree risk. We further define the nth-degree prudence utility premium as the increase in pain when the individual suffers a sure loss. We show that the nth-degree utility premium, normalized by the (n−1)th derivative of the utility function evaluated at the initial wealth, can explain comparative risk aversion of higher orders. On the other hand, the nth-degree prudence utility premium, normalized by the nth derivative of the utility function evaluated at the initial wealth, can explain comparative prudence of higher orders.

Keywords: Comparative prudence; Comparative risk aversion; Prudence utility premium; Utility premium (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:169:y:2018:i:c:p:38-42

DOI: 10.1016/j.econlet.2018.05.005

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