The Behavioural Components of Risk Aversion

Greg B. Davies and Stephen E. Satchell

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: The risk premium is affected by loss aversion and probability distortions as well as utility curvature. We introduce two variants - the total risk premium relative to objective expected value, and the subjective risk premium relative to perceived expected value. Approximate solutions for each provide analogies to the Pratt-Arrow coefficient of risk aversion (showing how risk attitude depends on each behavioural component), and sufficient conditions for risk aversion. Earlier results of Levy and Levy (2002) which examined decision weights in isolation are revised and extended to show how the curvature and loss aversion conditions are affected by probability distortions.

Keywords: Risk-Premium; Cumulative Prospect Theory; Loss Aversion; Decision Weights; Utility Curvature (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
Pages: 55
Date: 2004-10
New Economics Papers: this item is included in nep-cbe, nep-evo and nep-fin
Note: EM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0458

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