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Accuracy of Risk Aversion Approximations

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  • Joseph Eisenhauer

Abstract

This paper investigates the accuracy of a widely used approximation for empirically estimating the coefficients of absolute and relative risk aversion. The size and sign of the approximation errors depend upon the magnitude of the risk, the extent of the skewness in the probability distribution governing risky outcomes, and the concavity of the underlying utility function, as well as the interactions among these factors. Copyright International Atlantic Economic Society 2012

Suggested Citation

  • Joseph Eisenhauer, 2012. "Accuracy of Risk Aversion Approximations," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 40(2), pages 147-160, June.
    • Handle: RePEc:kap:atlecj:v:40:y:2012:i:2:p:147-160
    DOI: 10.1007/s11293-012-9314-6
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    References listed on IDEAS

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    1. Jean-Jacques Laffont, 1989. "The Economics of Uncertainty and Information," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121360, April.
    2. Chavas, Jean-Paul, 2004. "Risk Analysis in Theory and Practice," Elsevier Monographs, Elsevier, edition 1, number 9780121706210.
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    Cited by:

    1. Joseph G. Eisenhauer, 2017. "Quantifying the Subjective Value of Certainty," German Economic Review, Verein für Socialpolitik, vol. 18(1), pages 118-131, February.

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    More about this item

    Keywords

    Probability distribution; Risk aversion; Pratt’s approximation; D81; Criteria for decision-making under risk and uncertainty;
    All these keywords.

    JEL classification:

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

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