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The utility premium of Friedman and Savage, comparative risk aversion, and comparative prudence

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  • Huang, James
  • Stapleton, Richard

Abstract

We show that the utility premium of Friedman and Savage can be used to explain comparative risk aversion and comparative prudence. More precisely, we show that the greater the risk aversion measure, the greater a risk’s utility premium normalized by the marginal utility and that the greater the prudence measure, the greater the utility premium for disaggregating a certain loss of wealth and a zero-mean risk normalized by the utility function’s second derivative.

Suggested Citation

  • Huang, James & Stapleton, Richard, 2015. "The utility premium of Friedman and Savage, comparative risk aversion, and comparative prudence," Economics Letters, Elsevier, vol. 134(C), pages 34-36.
    • Handle: RePEc:eee:ecolet:v:134:y:2015:i:c:p:34-36
    DOI: 10.1016/j.econlet.2015.06.004
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    15. Jindapon, Paan, 2010. "Prudence probability premium," Economics Letters, Elsevier, vol. 109(1), pages 34-37, October.
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    Cited by:

    1. Heinzel, Christoph, 2023. "Comparing utility derivative premia under additive and multiplicative risks," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 23-40.
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    3. Christophe Courbage & Henri Loubergé & Béatrice Rey, 2018. "On the properties of high-order non-monetary measures for risks," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 77-94, May.
    4. Eeckhoudt, Louis R. & Laeven, Roger J.A., 2015. "The probability premium: A graphical representation," Economics Letters, Elsevier, vol. 136(C), pages 39-41.

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    More about this item

    Keywords

    Utility premium; Comparative risk aversion; Comparative prudence;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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