Accuracy of Risk Aversion Approximations

Joseph Eisenhauer ()

Atlantic Economic Journal, 2012, vol. 40, issue 2, 147-160

Abstract: This paper investigates the accuracy of a widely used approximation for empirically estimating the coefficients of absolute and relative risk aversion. The size and sign of the approximation errors depend upon the magnitude of the risk, the extent of the skewness in the probability distribution governing risky outcomes, and the concavity of the underlying utility function, as well as the interactions among these factors. Copyright International Atlantic Economic Society 2012

Keywords: Probability distribution; Risk aversion; Pratt’s approximation; D81; Criteria for decision-making under risk and uncertainty (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:kap:atlecj:v:40:y:2012:i:2:p:147-160

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DOI: 10.1007/s11293-012-9314-6

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