A generalization of Pratt-Arrow measure to nonexpected-utility preferences and inseparable probability and utility

Published

Journal Article

The Pratt-Arrow measure of local risk aversion is generalized for the n-dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility preferences. Local risk aversion is measured by the matrix of derivatives of the decision maker's risk-neutral probabilities, without reference to true subjective probabilities or riskless wealth positions, and comparative risk aversion is measured without requiring agreement on true probabilities. Risk-neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims.

Full Text

Duke Authors

Cited Authors

  • Nau, RF

Published Date

  • January 1, 2003

Published In

Volume / Issue

  • 49 / 8

Start / End Page

  • 1089 - 1104

International Standard Serial Number (ISSN)

  • 0025-1909

Digital Object Identifier (DOI)

  • 10.1287/mnsc.49.8.1089.16398

Citation Source

  • Scopus