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Risk aversion under preference uncertainty

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  • Kräussl, Roman
  • Lucas, André
  • Siegmann, Arjen

Abstract

We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for optimal asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty.

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  • Kräussl, Roman & Lucas, André & Siegmann, Arjen, 2012. "Risk aversion under preference uncertainty," Finance Research Letters, Elsevier, vol. 9(1), pages 1-7.
    • Handle: RePEc:eee:finlet:v:9:y:2012:i:1:p:1-7
    DOI: 10.1016/j.frl.2011.08.001
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    More about this item

    Keywords

    Risk aversion; Preference uncertainty; Risk-taking; Optimal asset allocation;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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