Discrete Arrow–Pratt indexes for risk and uncertainty

Aurelien Baillon () and Olivier L’Haridon
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Olivier L’Haridon: Université de Rennes 1, Univ Rennes
Authors registered in the RePEc Author Service: Olivier L'Haridon

Economic Theory, 2021, vol. 72, issue 4, No 10, 1375-1393

Abstract: Abstract The Arrow–Pratt index, a gold standard in studies of risk attitudes, is not directly observable from choice data. Existing methods to measure it rely on parametric assumptions. We introduce a discrete Arrow–Pratt index, and its relative counterpart, that can be directly obtained from choices. Our approach is general: it is (i) non-parametric, (ii) applicable to both risk and uncertainty, (iii) and robust to probability transformation, non-additive beliefs and multiple priors. Our index can also be used to characterize various decision models through various simple consistency requirements. We analyze its properties and demonstrate how it can be measured.

Keywords: Risk aversion; Arrow–Pratt index; CARA; CRRA; Preference foundation (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s00199-020-01315-8

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