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

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