IDEAS home Printed from https://ideas.repec.org/a/inm/ordeca/v22y2025i1p14-29.html
   My bibliography  Save this article

Why Investors Want Risk

Author

Listed:
  • David Johnstone

    (University of Wollongong, Wollongong, New South Wales 2500, Australia; and University of Sydney, Sydney, New South Wales 2006, Australia)

  • Yan-Xia Lin

    (University of Wollongong, Wollongong, New South Wales 2500, Australia)

Abstract

We imagine investors taking shares in an exogenous lognormal cash payoff with known parameters. Using a power utility (constant relative risk aversion (CRRA)) replica of Lintner’s static payoffs -based constant absolute risk aversion-normal capital asset pricing model, we examine how an investor’s expected utility is affected by the payoff parameters and surrounding market conditions. The market clearing asset price falls as a proportion of wealth when market wealth is higher, implying that CRRA investors hold a lower (rather than fixed) proportion of wealth in the risky asset when they are wealthier. Investors prefer conditions where they can obtain more risk, either because the risky payoff is exogenously riskier or competing investors want less. The equilibrium asset price is “disproportionately” lower when the asset is riskier, or when there are fewer willing buyers, leaving a better opportunity with higher expected utility.

Suggested Citation

  • David Johnstone & Yan-Xia Lin, 2025. "Why Investors Want Risk," Decision Analysis, INFORMS, vol. 22(1), pages 14-29, March.
    • Handle: RePEc:inm:ordeca:v:22:y:2025:i:1:p:14-29
    DOI: 10.1287/deca.2024.0206
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/deca.2024.0206
    Download Restriction: no
    File URL: https://libkey.io/10.1287/deca.2024.0206?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ordeca:v:22:y:2025:i:1:p:14-29. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.