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On the intensity of downside risk aversion. (English) Zbl 1151.91428
Summary: The degree of downside risk aversion (or equivalently prudence) is so far usually measured by \(\frac{-U^{\prime \prime \prime}}{U^{\prime \prime}}\). We propose here another measure, \(\frac{U^{\prime \prime \prime}}{U^{\prime}}\), which has specific and interesting local and global properties. Some of these properties are to a wide extent similar to those of the classical measure of absolute risk aversion, which is not always the case for \(\frac{-U^{\prime \prime \prime}}{U^{\prime \prime}}\). It also appears that the two measures are not mutually exclusive. Instead, they seem to be rather complementary as shown through an economic application dealing with a simple general equilibrium model of savings.

MSC:
91B16 Utility theory
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