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- Title
RISK AVERSION WITH RANDOM INITIAL WEALTH.
- Authors
Kihlstrom, Richard E.; Romer, David; Williams, Steve
- Abstract
This paper considers the possibility of extending the Arrow-Pratt results on risk aversion to cases in which initial wealth is random. Specifically, we consider a situation in which an individual's wealth is the sum of two independent random variables ... and .... We define the risk premium π(..., ...) which represents the reduction in mean wealth an individual is willing to accept to eliminate the random variable ... while retaining the random variable .... It is shown that if u1 is uniformly more (Arrow-Pratt) risk averse than u2 and if either u1 or u2 exhibit nonincreasing (Arrow-Pratt) risk aversion, then π2(..., ...) is always smaller than π1(..., ...). An example is given in which both u1 and u2 exhibit increasing risk aversion and in which this result fails.
- Subjects
RISK; RISK aversion; UTILITY theory; RISK management in business; WEALTH; RANDOM variables; ECONOMETRICS; ECONOMICS; MATHEMATICAL economics
- Publication
Econometrica, 1981, Vol 49, Issue 4, p911
- ISSN
0012-9682
- Publication type
Article
- DOI
10.2307/1912510