The dependence of the incremental risk rate of interest on absolute risk aversion - Applying the Laplace transform to risk preference evaluation

Robert W. Grubbström

International Journal of Production Economics, 2019, vol. 212, issue C, 51-59

Abstract: In this paper we base our study on the application of the Laplace transform to risk preference theory. With a constant measure of absolute risk aversion (Pratt, 1964; Arrow, 1965), the Certainty Monetary Equivalent (CME) of a risky project previously has been developed into an expression involving the logarithm of the bilateral Laplace transform of the probability density of its stochastic economic outcome. The internal risk aversion (IRA) is the break-even level of the absolute risk aversion, between making the project favourable or unfavourable.

Keywords: Risk preference; Laplace transform; Risk aversion; Certainty monetary equivalent (CME); Net present value (NPV); Internal risk aversion (IRA) (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:212:y:2019:i:c:p:51-59

DOI: 10.1016/j.ijpe.2019.01.031

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