The Psychology of Risk

Olivier Le Courtois and Christian Walter ()

Chapter 10 in Extreme Financial Risks and Asset Allocation, 2014, pp 253-274 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Familiarity with and a description of the psychology of financial actors are prerequisites for any theory of portfolio management. The objective of this chapter is therefore to set up the theoretical concepts necessary to derive the ideas presented in the chapters on static and dynamic portfolio management. After having presented the foundations of expected utility by means of the notions of psychological value and certainty equivalent of a random value, an approximation of the risk premium to different orders is performed. These correspond to the psychological attitudes of investors to different moments of distributions. An in-depth analysis of the coefficients of aversion to or taste for the first moments is conducted. The chapter concludes with a study of the Hyperbolic Absolute Risk Aversion (HARA) functions and of their coefficients of aversion expressed to different orders.

Keywords: Lévy Process; Extreme Risks; Risk Management; Portfolio Management; Asset Allocation (search for similar items in EconPapers)
Date: 2014
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