A conceptual foundation for the theory of risk aversion
Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem
Classically, risk aversion is equated with concavity of the utility function. In this work we explore the conceptual foundations of this definition. In accordance with neo-classical economics, we seek an ordinal definition, based on the decisions maker’s preference order, independent of numerical values. We present two such definitions, based on simple, conceptually appealing interpretations of the notion of risk-aversion. We then show that when cast in quantitative form these ordinal definitions coincide with the classical Arrow-Pratt definition (once the latter is defined with respect to the appropriate units), thus providing a conceptual foundation for the classical definition. The implications of the theory are discussed, including, in particular, to the understanding of insurance. The entire study is within the expected utility framework.
Keywords: Risk aversion; Utility theory; Ordinal preferences; Multiple objectives decision making (search for similar items in EconPapers)
Pages: 39 pages
New Economics Papers: this item is included in nep-cbe, nep-mic, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:huj:dispap:dp686
Access Statistics for this paper
More papers in Discussion Paper Series from The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem Contact information at EDIRC.
Bibliographic data for series maintained by Michael Simkin ().