Slides17-2010

# Slides17-2010 - Risk Aversion in the Large and Small...

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Risk Aversion in the Large and Small Charles B. Moss Outline Basics of Risk Aversion Risk Aversion and Concavity Arrow-Pratt Local Risk Aversion Relative and Absolute Risk Aversion Risk Aversion in the Large and Small: Lecture XVII Charles B. Moss October 4, 2010 Charles B. Moss Risk Aversion in the Large and Small

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Risk Aversion in the Large and Small Charles B. Moss Outline Basics of Risk Aversion Risk Aversion and Concavity Arrow-Pratt Local Risk Aversion Relative and Absolute Risk Aversion 1 Basics of Risk Aversion Risk Aversion and Concavity 2 Arrow-Pratt Local Risk Aversion Relative and Absolute Risk Aversion Charles B. Moss Risk Aversion in the Large and Small
Risk Aversion in the Large and Small Charles B. Moss Outline Basics of Risk Aversion Risk Aversion and Concavity Arrow-Pratt Local Risk Aversion Relative and Absolute Risk Aversion Basics of Risk Aversion Back to Friedman and Savage: An economic agen with a von Neumann-Morgenstern utility function v : R R is weakly risk averse if and only if E [ v ( c )] v ( E [ c ]) (1) for every consumption plan c . An economic agent is risk neutral if E [ v ( c )] = v ( E [ c ]) (2) Similarly, an economic agent is strictly risk averse if E [ v ( c )] < v ( E [ c ]) (3) Charles B. Moss Risk Aversion in the Large and Small

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Risk Aversion in the Large and Small Charles B. Moss Outline Basics of Risk Aversion Risk Aversion and Concavity Arrow-Pratt Local Risk Aversion Relative and Absolute Risk Aversion Risk Aversion and Concavity Risk Aversion and Concavity Theorem 4.1 p-87 The agent is risk averse if and only if his or her von Neumann-Morgenstern utility function v is concave. An agent is risk neutral if and only if his or her von Neumann-Morgenstern utility function v is linear. An agent is strictly risk avers if and only if his or her von Neumann-Morgenstern utility function v is strictly concave. Charles B. Moss Risk Aversion in the Large and Small
Risk Aversion in the Large and Small Charles B.

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## This note was uploaded on 07/15/2011 for the course AEB 6182 taught by Professor Weldon during the Fall '08 term at University of Florida.

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Slides17-2010 - Risk Aversion in the Large and Small...

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