Decision Analysis Working Paper Abstract
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WP030006
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Title: A Generalization Of Pratt-Arrow Measure To Non-Expected-Utility
Preferences And Inseparable Probability And Utility
Authors: Robert
F. Nau,
Duke University
Date: September 2002
Status: working paper
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 probabilities and subjective utilities, unobservable
stochastic prior wealth, and/or smooth non-expected-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. Comparative risk aversion
is measured without requiring agreement on true probabilities, and decreasing
risk aversion is characterized without reference to riskless wealth.
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.
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