Risk Aversion in the Small and in the Large

Pratt, J. W. (1964). Risk Aversion in the Small and in the Large. Econometrica, 32(1), 1-2.

Type

Journal article

Intellectual base

Primary research

Year

1964

DOI

10.2307/1913738

Link

https://doi.org/10.2307/1913738

Cited from

economics_finance

Cited by

3 citations across 3 artifacts.

Each citation links to the sentence it supports in the citing article.

Primes

• Expected Utility
  • Utility-of-wealth functions and their curvature underwrite the formal treatment of risk aversion (Pratt 1964; Arrow 1965) through the coefficient of absolute and relative risk aversion.

    This sourceDerives the coefficient of absolute risk aversion from the curvature of the von Neumann

• Marginal Utility
  • … over outcomes), the agent maximizes expected utility $E[U] = \sum_s p_s U(x_s)$, and the marginal utility of wealth in state $s$ determines risk aversion through the Arrow-Pratt coefficient $r(x) = -U''(x) / U'(x)$ (the ratio of the second to the first derivative of $U$, a measure of curvature concavity)

    This sourceDerives the coefficient of absolute risk aversion from the curvature of the von Neumann–Morgenstern utility function and links concavity to the risk premium, grounding why risk-averse agents value variance-reducing moves such as diversification and insurance.

• Risk Aversion
  • and Pratt (1964)

    This sourceDerives the coefficient of absolute risk aversion r_A(w) = −U''(w)/U'(w) from the curvature of the von Neumann–Morgenstern utility function and links concavity to the risk premium, grounding why risk-averse agents value variance-reducing moves such as diversification and insurance.

Verification

This reference passed the adversarial substantiation pipeline: it was checked to exist and to support the claim it is attached to. See how references were verified.

Registry ID ref:6b279df4c7d9 · see in the full table