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Stochastic Dominance and Absolute Risk Aversion

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  • Jordi Caballé
  • Joan-Maria Esteban

Abstract

In this paper we propose the infimum of the Arrow-Pratt index of absolute risk aversion as a measure of global risk aversion of a utility function. We show that, for any given arbitrary pair of distributions, there exists a threshold level of global risk aversion such that all increasing concave utility functions with at least as much global risk aversion would rank the two distributions in the same way. Furthermore, this threshold level is sharp in the sense that, for any lower level of global risk aversion, we can find two utility functions in this class yielding opposite preference relations for the two distributions.

Suggested Citation

  • Jordi Caballé & Joan-Maria Esteban, 2003. "Stochastic Dominance and Absolute Risk Aversion," Working Papers 9, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:9
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    References listed on IDEAS

    as
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    2. Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
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    6. Christian Gollier & Miles S. Kimball, 2018. "New methods in the classical economics of uncertainty: comparing 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 5-23, May.
    7. repec:bla:econom:v:50:y:1983:i:197:p:3-17 is not listed on IDEAS
    8. Meyer, Jack, 1977. "Second Degree Stochastic Dominance with Respect to a Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 477-487, June.
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    Cited by:

    1. Eisenhauer, Joseph G., 2006. "Risk aversion and prudence in the large," Research in Economics, Elsevier, vol. 60(4), pages 179-187, December.
    2. Christian Gollier & Miles S. Kimball, 2018. "New methods in the classical economics of uncertainty: comparing 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 5-23, May.
    3. Eisenhauer, Joseph G., 2010. "Rank-ordering of risk preferences with conventional and discrete measures," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 291-297, August.

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    More about this item

    Keywords

    Risk Aversion; Stochastic dominance;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D30 - Microeconomics - - Distribution - - - General

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