Broadly Decreasing Risk Aversion
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.
Gelles, G. M., & Mitchell, D. W. (1999). Broadly Decreasing Risk Aversion. Management Science, 45(10), pp. 1432-1439. Institute for Operations Research and Management Sciences (INFORMS).
The definitive version is available at https://doi.org/10.1287/mnsc.45.10.1432
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)
Article - Journal
© 1999 INFORMS, All rights reserved.
01 Oct 1999