Risk Aversion and Risk Vulnerability in the Continuous and Discrete Case: A Unified Treatment with Extensions: A Unified Treatment with Extensions

Abstract

This paper discusses utility functions for money, where allowable money values are from an arbitrary nonempty closed subset of the real numbers. Thus, the classical case, where this subset is a closed interval (bounded or not) of the real line, is included in the study. The discrete case, where this subset is the set of all integer numbers, is also included. In a sense, the discrete case (which has not been addressed in the literature thus far) is more suitable for real-world applications than the continuous case. In this general setting, the concepts of risk aversion and risk premium are defined, an analogue of Pratt's fundamental theorem is proved, and temperance, prudence, and risk vulnerability are examined.

Department(s)

Mathematics and Statistics

Second Department

Economics

Comments

This work was supported by the NSF Interdisciplinary Grant #0624127, "Time Scales in Economics and Finance."

Keywords and Phrases

Delta derivative; Risk aversion; Risk vulnerability; Time scale; Utility function

International Standard Serial Number (ISSN)

1593-8883; 1129-6569

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2012 Springer Verlag, All rights reserved.

Publication Date

01 May 2012

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