The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Risk Aversion

  • Jan Werner
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2741

Abstract

An agent, perhaps an individual or a firm, is said to be risk averse if the agent prefers a deterministic outcome equal to the expectation of a risky outcome over that risky outcome. Risk aversion seems to be a common characteristic; introspection suggests as much. More importantly, it gives qualitative explanation to economic behaviour in many instances where risk is present. If individuals and firms were not risk averse, insurance markets would not exist. Needless to say, there are activities which are inconsistent with agents being risk averse. Gambling is perhaps the best example of such an activity.

Keywords

Arrow–Pratt theory of risk aversion Arrow–Pratt measure of absolute risk aversion Arrow–Pratt measure of relative risk aversion Certainty equivalent Concavity Dual utility Equity premium puzzle Expected utility theory Insurance markets Maxmin expected utility Multivariate risk Probability measures Random variables Rank-dependent expected utility Relative risk Representation of preferences Risk aversion Risk compensation Risk–return trade-off Schur concave functions State-dependent utility Stochastic dominance von Neumann–Morgenstern utility function Wald’s criterion 

JEL Classification

D81 G12 D81 
This is a preview of subscription content, log in to check access.

Bibliography

  1. Arrow, K. 1965. Aspect of the theory of risk bearing. Helsinki: Yrjö Jahnsson Foundation.Google Scholar
  2. Chew, S., and M. Mao. 1995. A Schur concave characterization of risk aversion for non-expected utility preferences. Journal of Economic Theory 67: 402–435.CrossRefGoogle Scholar
  3. Chew, S., E. Karni, and Z. Safra. 1987. Risk aversion in the theory of expected utility with rank dependent preferences. Journal of Economic Theory 42: 370–381.CrossRefGoogle Scholar
  4. Cohen, M. 1995. Risk-aversion concepts in expected-and non-expected-utility models. Geneva Papers on Risk and Insurance Theory 20: 73–91.CrossRefGoogle Scholar
  5. Dana, R.-A. 2005. A representation result for concave Schur-concave functions. Mathematical Finance 15: 613–634.CrossRefGoogle Scholar
  6. Gilboa, I., and D. Schmeidler. 1989. Maxmin expected utility with nonunique prior. Journal of Mathematical Economics 18: 141–153.CrossRefGoogle Scholar
  7. Karni, E. 1985. Decision making under uncertainty. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  8. Kihlstrom, R., and L. Mirman. 1974. Risk aversion with many commodities. Journal of Economic Theory 8: 361–388.CrossRefGoogle Scholar
  9. Machina, M. 1982. Expected utility analysis without the independence axiom. Econometrica 50: 277–323.CrossRefGoogle Scholar
  10. Machina, M., and W. Neilson. 1987. The Ross characterization of risk aversion: Strengthening and extension. Econometrica 55: 1139–1149.CrossRefGoogle Scholar
  11. Marshall, A., and I. Olkin. 1979. Inequalities: Theory of majorization and its applications. New York: Academic.Google Scholar
  12. Mehra, R., and E. Prescott. 1985. The equity premium: A puzzle. Journal of Monetary Economics 15: 145–161.CrossRefGoogle Scholar
  13. Pratt, J. 1964. Risk aversion in the small and in the large. Econometrica 32: 132–136.CrossRefGoogle Scholar
  14. Quiggin, J. 1982. A theory of anticipated utility. Journal of Economic Behavior and Organization 3: 323–343.CrossRefGoogle Scholar
  15. Rabin, M., and R. Thaler. 2001. Anomalies: Risk aversion. Journal of Economic Perspectives 15(1): 219–232.CrossRefGoogle Scholar
  16. Ross, S. 1981. Some stronger measures of risk aversion in the small and in the large with applications. Econometrica 49: 621–638.CrossRefGoogle Scholar
  17. Rothschild, M., and J. Stiglitz. 1970. Increasing risk. I: A definition. Journal of Economic Theory 2: 225–243.CrossRefGoogle Scholar
  18. Schlesinger, H. 1997. Insurance demand without the expected-utility paradigm. Journal of Risk and Insurance 64(1): 19–39.CrossRefGoogle Scholar
  19. Werner, J. 2005a. A simple axiomatization of risk-averse expected utility. Economics Letters 88: 73–77.Google Scholar
  20. Werner, J. 2005b. Risk and risk aversion when states of nature matter. Mimeo.Google Scholar
  21. Yaari, M. 1987. The dual theory of choice under risk. Econometrica 55: 95–115.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Jan Werner
    • 1
  1. 1.