Standard risk aversion
TL;DR: In this paper, the concept of standard risk aversion was introduced, which implies that any risk that makes a small reduction in wealth more painful (in the sense of an increased reduction in expected utility) also makes any undesirable, independent risk more painful.
read more
Abstract: This paper introduces the concept of standard risk aversion. A von Neumann-Morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful (in the sense of an increased reduction in expected utility) also makes any undesirable, independent risk more painful. It is shown that, given monotonicity and concavity, the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion. Standard risk aversion is shown to imply not only Pratt and Zeckhauser's 'proper risk aversion" (individually undesirable, independent risks always being jointly undesirable) , but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return. Similar results are established for the effect of broad class of increases in one risk on the desirability of (or optimal investment in) a second, independent risk.
read more
Chat with Paper
AI Agents for this Paper
Find similar papers on Google Scholar, PubMed and Arxiv
Write a critical review of this paper
Analyze citations of this paper to find unaddressed research gaps
Citations
The Role of Social Capital in Financial Development
TL;DR: In this article, the authors identify the effect of social capital on financial development by exploiting social capital differences within Italy and find that households are more likely to use checks, invest less in cash and more in stock, have higher access to institutional credit, and make less use of informal credit.
Trusting the stock market
TL;DR: In this article, the authors study the effect of lack of trust on stock market participation and find that less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less.
1.8K
Consumption and Portfolio Choice over the Life Cycle
TL;DR: In this article, a realistically calibrated life cycle model of consumption and portfolio choice with non-tradable labor income and borrowing constraints is proposed, and the optimal share invested in equities is roughly decreasing over life.
Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk
John Heaton,Deborah Lucas +1 more
TL;DR: In this paper, the authors show that entrepreneurial income risk has a significant impact on portfolio choice and asset prices, and they find that households with high and variable business income hold less wealth in stocks than other similarly wealthy households, although they constitute a significant fraction of the stockholding population.
1.2K
Risk aversion, wealth, and background risk
Luigi Guiso,Monica Paiella +1 more
TL;DR: In this paper, the authors use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security, and relate this measure to consumer's endowments and attributes.