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Rubinstein2005-page122 - other possible meaning is that...

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October 21, 2005 12:18 master Sheet number 120 Page number 104 104 Lecture Nine Figure 9.2 CE and risk premium. risk premium of p is the difference R ( P ) = E ( p ) CE ( p ) . By deFnition, the preferences are risk averse if and only if R ( p ) 0 for all p . (See Fg. 9.2.) The “More Risk Averse” Relation We wish to formalize the statement “one decision maker is more risk averse than another.” To understand the logic of the following deFnitions let us start with an analogous phrase: What is the mean- ing of the statement “ A is more war averse than B ”? One possible meaning is that whenever A is ready to go to war, B is as well. An-
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Unformatted text preview: other possible meaning is that when facing the threat of war, A is ready to agree to a less attractive compromise in order to prevent war than B . The following two deFnitions are analogous to these two interpretations. 1. The preference relation % 1 is more risk averse than % 2 if for any lottery p and degenerate lottery c , p % 1 c implies that p % 2 c . In case the preferences are monotonic, we have a second deFni-tion: 2. The preference relation % 1 is more risk averse than % 2 if CE 1 ( p ) ≤ CE 2 ( p ) for all p ....
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