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- Title
A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility.
- Authors
Nau, Robert F.
- Abstract
The Pratt-Arrow measure of local risk aversion is generalized for the n-dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility preferences. Local risk aversion is measured by the matrix of derivatives of the decision maker's risk-neutral probabilities, without reference to true subjective probabilities or riskless wealth positions, and comparative risk aversion is measured without requiring agreement on true probabilities. Risk-neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims.
- Subjects
UTILITY theory; RISK aversion; DISTRIBUTION (Probability theory); DECISION making; EXPECTED utility; FINANCE
- Publication
Management Science, 2003, Vol 49, Issue 8, p1089
- ISSN
0025-1909
- Publication type
Article
- DOI
10.1287/mnsc.49.8.1089.16398