On risk aversion, classical demand theory, and KM preferences

Leonard Mirman and Marc Santugini ()

Journal of Risk and Uncertainty, 2014, vol. 48, issue 1, 66 pages

Abstract: Building on Kihlstrom and Mirman (Journal of Economic Theory, 8(3), 361–388, 1974 )’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer’s maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision. Copyright Springer Science+Business Media New York 2014

Keywords: Classical demand theory; Consumer choice; Income and substitution effects; Risk aversion; D01; D81; D91 (search for similar items in EconPapers)
Date: 2014
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Working Paper: On Risk Aversion, Classical Demand Theory, and KM Preferences (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jrisku:v:48:y:2014:i:1:p:51-66

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DOI: 10.1007/s11166-014-9182-3

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