On Risk Aversion and Prudence
18 Pages Posted: 23 Jan 2013 Last revised: 18 Mar 2013
Date Written: January 22, 2013
Abstract
Building on the isomorphism between the theories of risk aversion and precautionary saving, an objective index of prudent behavior is introduced, which generalizes the riskiness index set forth by Aumann and Serrano (2008). A benchmark framework for the monotone relation between risk aversion and prudence results, in which absence of level effects and stochastic dominance of shocks are crucial, and generalized risk measures enable us to embed the fundamental result set forth by Menegatti (2007). Effective maps of completely proper rationality (Mantovi, 2013) enable one to parametrize departure from our benchmark framework in terms of level effects which preserve the positive effect of absolute risk aversion on absolute prudence.
Keywords: riskiness, level effects, stochastic dominance, risk aversion, prudence, standard risk aversion, complete properness.
JEL Classification: D11, D81, E21
Suggested Citation: Suggested Citation