Broadly Decreasing Risk Aversion

Abstract

This paper considers decision-making in the presence of two additive risk sources, with no restrictions on the relation between the two risks. A utility function is said to exhibit broad DARA if and only if a rise in wealth always decreases the magnitude of the risk premium for one of the risks vis-a-vis the other. A condition on utility functions giving this property is derived: utility must be of the linear plus exponential form. It is shown that certain problems involving portfolios and risk-averse firms give unambiguous comparative statics if and only if utility exhibits broad DARA.

Department(s)

Economics

Keywords and Phrases

Decision making; Functions; Linear equations; Risk management, Choose under uncertainty; Decision making under risk; Decreasing absolute risk aversion; Portfolios choice; Risk averse firm; Risk premium, Risk assessment

International Standard Serial Number (ISSN)

0025-1909,; 1526-5501

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 1999 Institute for Operations Research and the Management Sciences (INFORMS), All rights reserved.

Publication Date

01 Oct 1999

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