A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility
The Pratt-Arrow measure of local risk aversion is generalized for the n -dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility pre...
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| Veröffentlicht in: | Management science 2003-08, Vol.49 (8), p.1089-1104 |
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| creator | Nau, Robert F |
| description | The Pratt-Arrow measure of local risk aversion is generalized for the n -dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility preferences. Local risk aversion is measured by the matrix of derivatives of the decision maker's risk-neutral probabilities, without reference to true subjective probabilities or riskless wealth positions, and comparative risk aversion is measured without requiring agreement on true probabilities. Risk-neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims. |
| doi_str_mv | 10.1287/mnsc.49.8.1089.16398 |
| format | Article |
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Local risk aversion is measured by the matrix of derivatives of the decision maker's risk-neutral probabilities, without reference to true subjective probabilities or riskless wealth positions, and comparative risk aversion is measured without requiring agreement on true probabilities. Risk-neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims.</description><identifier>ISSN: 0025-1909</identifier><identifier>EISSN: 1526-5501</identifier><identifier>DOI: 10.1287/mnsc.49.8.1089.16398</identifier><identifier>CODEN: MNSCDI</identifier><language>eng</language><publisher>Linthicum: INFORMS</publisher><subject>Business studies ; Criteria for Decision Making Under Risk and Uncertainty ; Decision making ; Economic analysis ; Economic theory ; Economic uncertainty ; Economic utility ; Expected utility ; Expected values ; Expected-Utility Theory ; Financial risk ; Indifference curves ; Management ; Market prices ; Mathematical models ; Methods ; Nonexpected-Utility ; Preferences ; Probability ; Risk ; Risk Aversion ; Risk aversion preference ; Risk premiums ; Risk-taking (Psychology) ; Smooth Preferences ; Studies ; Uncertainty ; Uncertainty Aversion ; Utility functions ; Utility theory ; Wealth ; Wealth distribution</subject><ispartof>Management science, 2003-08, Vol.49 (8), p.1089-1104</ispartof><rights>Copyright 2003 INFORMS</rights><rights>COPYRIGHT 2003 Institute for Operations Research and the Management Sciences</rights><rights>Copyright Institute for Operations Research and the Management Sciences Aug 2003</rights><lds50>peer_reviewed</lds50><woscitedreferencessubscribed>false</woscitedreferencessubscribed><citedby>FETCH-LOGICAL-c605t-a8167a5f6e3adc3a79aa796698c0fe2913b08d8869cacf5ce94d9f8b4a7499e23</citedby><cites>FETCH-LOGICAL-c605t-a8167a5f6e3adc3a79aa796698c0fe2913b08d8869cacf5ce94d9f8b4a7499e23</cites></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><linktopdf>$$Uhttps://www.jstor.org/stable/pdf/4133938$$EPDF$$P50$$Gjstor$$H</linktopdf><linktohtml>$$Uhttps://pubsonline.informs.org/doi/full/10.1287/mnsc.49.8.1089.16398$$EHTML$$P50$$Ginforms$$H</linktohtml><link.rule.ids>314,780,784,803,3692,4008,27924,27925,58017,58250,62616</link.rule.ids><backlink>$$Uhttp://econpapers.repec.org/article/inmormnsc/v_3a49_3ay_3a2003_3ai_3a8_3ap_3a1089-1104.htm$$DView record in RePEc$$Hfree_for_read</backlink></links><search><creatorcontrib>Nau, Robert F</creatorcontrib><title>A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility</title><title>Management science</title><description>The Pratt-Arrow measure of local risk aversion is generalized for the n -dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility preferences. Local risk aversion is measured by the matrix of derivatives of the decision maker's risk-neutral probabilities, without reference to true subjective probabilities or riskless wealth positions, and comparative risk aversion is measured without requiring agreement on true probabilities. Risk-neutral probabilities and their derivatives are shown to be sufficient statistics for approximately optimal investment and financing decisions in complete markets for contingent claims.</description><subject>Business studies</subject><subject>Criteria for Decision Making Under Risk and Uncertainty</subject><subject>Decision making</subject><subject>Economic analysis</subject><subject>Economic theory</subject><subject>Economic uncertainty</subject><subject>Economic utility</subject><subject>Expected utility</subject><subject>Expected values</subject><subject>Expected-Utility Theory</subject><subject>Financial risk</subject><subject>Indifference curves</subject><subject>Management</subject><subject>Market prices</subject><subject>Mathematical models</subject><subject>Methods</subject><subject>Nonexpected-Utility</subject><subject>Preferences</subject><subject>Probability</subject><subject>Risk</subject><subject>Risk Aversion</subject><subject>Risk aversion preference</subject><subject>Risk premiums</subject><subject>Risk-taking (Psychology)</subject><subject>Smooth Preferences</subject><subject>Studies</subject><subject>Uncertainty</subject><subject>Uncertainty Aversion</subject><subject>Utility functions</subject><subject>Utility theory</subject><subject>Wealth</subject><subject>Wealth 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Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility</title><author>Nau, Robert F</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c605t-a8167a5f6e3adc3a79aa796698c0fe2913b08d8869cacf5ce94d9f8b4a7499e23</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2003</creationdate><topic>Business studies</topic><topic>Criteria for Decision Making Under Risk and Uncertainty</topic><topic>Decision making</topic><topic>Economic analysis</topic><topic>Economic theory</topic><topic>Economic uncertainty</topic><topic>Economic utility</topic><topic>Expected utility</topic><topic>Expected values</topic><topic>Expected-Utility Theory</topic><topic>Financial risk</topic><topic>Indifference curves</topic><topic>Management</topic><topic>Market prices</topic><topic>Mathematical models</topic><topic>Methods</topic><topic>Nonexpected-Utility</topic><topic>Preferences</topic><topic>Probability</topic><topic>Risk</topic><topic>Risk Aversion</topic><topic>Risk aversion preference</topic><topic>Risk premiums</topic><topic>Risk-taking (Psychology)</topic><topic>Smooth Preferences</topic><topic>Studies</topic><topic>Uncertainty</topic><topic>Uncertainty Aversion</topic><topic>Utility functions</topic><topic>Utility theory</topic><topic>Wealth</topic><topic>Wealth distribution</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Nau, Robert F</creatorcontrib><collection>RePEc IDEAS</collection><collection>RePEc</collection><collection>CrossRef</collection><collection>Global News & ABI/Inform Professional</collection><collection>Trade PRO</collection><collection>ProQuest Central (Corporate)</collection><collection>ABI/INFORM Collection</collection><collection>ABI/INFORM Global (PDF only)</collection><collection>Entrepreneurship 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measure of local risk aversion is generalized for the n -dimensional state-preference model of choice under uncertainty in which the decision maker may have inseparable subjective probabilities and utilities, unobservable stochastic prior wealth, and/or smooth nonexpected-utility preferences. 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| ispartof | Management science, 2003-08, Vol.49 (8), p.1089-1104 |
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| subjects | Business studies Criteria for Decision Making Under Risk and Uncertainty Decision making Economic analysis Economic theory Economic uncertainty Economic utility Expected utility Expected values Expected-Utility Theory Financial risk Indifference curves Management Market prices Mathematical models Methods Nonexpected-Utility Preferences Probability Risk Risk Aversion Risk aversion preference Risk premiums Risk-taking (Psychology) Smooth Preferences Studies Uncertainty Uncertainty Aversion Utility functions Utility theory Wealth Wealth distribution |
| title | A Generalization of Pratt-Arrow Measure to Nonexpected-Utility Preferences and Inseparable Probability and Utility |
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