Interval risk aversion


The conventional measures of absolute and relative risk aversion are appropriate for measuring preferences locally, but because they rely on differential calculus, they cannot accurately capture attitudes towards high-stakes risks involving potentially large changes in wealth. Eisenhauer (2006) has recently proposed an alternative approach which avoids the use of calculus. The present article extends that work in two ways. First, the Pratt-Arrow coefficient of absolute risk aversion is generalized into a measure of interval risk aversion, suitable for analysing preferences over risks of any magnitude, and a corresponding interval measure of relative risk aversion is constructed from preference and risk parameters, without explicit reference to initial wealth or income. Second, the new measures are applied to survey data from the Bank of Italy, to illustrate their empirical applicability to large-scale risk.

Similar works

Full text


Research Papers in Economics

Provided original full text link
Last time updated on 7/6/2012

This paper was published in Research Papers in Economics.

Having an issue?

Is data on this page outdated, violates copyrights or anything else? Report the problem now and we will take corresponding actions after reviewing your request.