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The Psychology of Risk

In: Extreme Financial Risks and Asset Allocation

Author

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  • Olivier Le Courtois
  • Christian Walter

Abstract

Familiarity with and a description of the psychology of financial actors are prerequisites for any theory of portfolio management. The objective of this chapter is therefore to set up the theoretical concepts necessary to derive the ideas presented in the chapters on static and dynamic portfolio management. After having presented the foundations of expected utility by means of the notions of psychological value and certainty equivalent of a random value, an approximation of the risk premium to different orders is performed. These correspond to the psychological attitudes of investors to different moments of distributions. An in-depth analysis of the coefficients of aversion to or taste for the first moments is conducted. The chapter concludes with a study of the Hyperbolic Absolute Risk Aversion (HARA) functions and of their coefficients of aversion expressed to different orders.

Suggested Citation

  • Olivier Le Courtois & Christian Walter, 2014. "The Psychology of Risk," World Scientific Book Chapters, in: Extreme Financial Risks and Asset Allocation, chapter 10, pages 253-274, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9781783263097_0010
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