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Interpretation and Transformation of Scale for the Pratt-Arrow Absolute Risk Aversion Coefficient: Implications for Stochastic Dominance

Rob Raskin and Mark J. Cochran

No 257669, Staff Papers from University of Arkansas, Department of Agricultural Economics and Agribusiness

Abstract: The Pratt-Arrow measure of absolute risk aversion, as defined by r(x} = u"{x}/u' (x}, is well known to be "invariant to linear transformations." However, this invariance property applies with respect to transformations of u and not with respect to arbitrary rescalings of x. The effects of this misunderstanding has led to ambiguity as to what actually constitutes behavior tnat is "slightly risk averse," "very risk averse," etc. The use of the coefficient in "per acre" analyses is particularly addressed.

Keywords: Research; Methods/; Statistical; Methods (search for similar items in EconPapers)
Date: 1985-11-01
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