Risk Aversion

James Ming Chen
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James Ming Chen: Michigan State University

Chapter Chapter 6 in Finance and the Behavioral Prospect, 2016, pp 111-135 from Palgrave Macmillan

Abstract: Abstract If only because protective instincts are pervasive among humans and prized in many social settings,1 behavioral finance demands a credible account of risk aversion.2 That account begins with the decline of expected utility theory.3 Behavioral economics arose as a response to the limitations of conventional game theory and expected utility theory.4 Behavioral economics adds a host of considerations that elude these conventional models of utility and risk.5 Because conventional definitions of risk aversion hold the key to solving behavioral challenges such as the equity risk premium and the equity premium puzzle,6 I will now propound some of the foundations of expected utility theory. I start by presenting the absolute and relative versions of the Arrow–Pratt measures of risk aversion, named for Kenneth Arrow7 and John Pratt.8 These measures are also known as the coefficients of absolute and relative risk aversion.9

Keywords: Utility Function; Risk Aversion; Supra Note; Sharpe Ratio; Relative Risk Aversion (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:qpochp:978-3-319-32711-2_6

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DOI: 10.1007/978-3-319-32711-2_6

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