Slides19-2010

# Slides19-2010 - Eliciting Risk Aversion Coecients Lecture...

This preview shows pages 1–7. Sign up to view the full content.

Eliciting Risk Aversion Coeﬃcients: Lecture XIX Charles B. Moss October 7, 2010 Charles B. Moss () Eliciting Risk Aversion Coeﬃcients October 7, 2010 1 / 17

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
1 Eliciting Risk Aversion Coeﬃcients Direct Elicitation of Utility Functions Equally Likely Risky Prospect 2 Savage State-Dependent Expected Utility Charles B. Moss () Eliciting Risk Aversion Coeﬃcients October 7, 2010 2 / 17
Direct Elicitation of Utility Functions Assume two possible outcomes of a random variable Y 1 which occurs with probability p and Y 2 which occurs with probability 1 P . As the decision maker whether he prefers the risky alternative to a certain payoF ˜ Y . I Suppose the decision maker is given an alternative between a 50/50 bet of paying \$50 or \$5 (with the expected return of \$27.50) or a certain payoF of \$25. I If the decision maker choose the risky alternative, the decision maker’s risk aversion coeﬃcient is less than 0.005944 E [ U ( Y )] = exp ( ρ Y 1 ) p exp ( ρ Y 2 )(1 p ) = exp ρ ˜ Y (1) Charles B. Moss () Eliciting Risk Aversion Coeﬃcients October 7, 2010 3 / 17

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Continued I The value for ρ can be solved using Gauss-Seidel. exp ( ρ 26 . 0) 0 . 50 exp( ρ 5) 0 . 50 exp ( ρ 50) = 0 . (2) Charles B. Moss () Eliciting Risk Aversion Coeﬃcients October 7, 2010 4 / 17
If the answer is no (they prefer the certain outcome to the risky alternative), either I Change the probabilities by making the higher return more likely (i.e., let p =0 . 40), exp ( ρ 26 . 0) 0 . 40 exp( ρ 5) 0 . 60 exp( ρ 50) = 0 (3) for which the risk aversion coeﬃcient increases to 0.0113. I Alternatively, decrease the certainty equivalent (i.e., to \$25.75). Charles B. Moss () Eliciting Risk Aversion Coeﬃcients October 7, 2010 5 / 17

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Equally Likely Risky Prospect and Finding its Certainty Equivalent (ELCE) This process begins by assigning the expected utility at two endpoint outcomes.
This is the end of the preview. Sign up to access the rest of the document.

## 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.

### Page1 / 18

Slides19-2010 - Eliciting Risk Aversion Coecients Lecture...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online