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On Risk Aversion, Classical Demand Theory, and KM Preferences

Journal of Risk and Uncertainty, Vol. 48, No. 1, 2014

Posted: 30 Mar 2014

See all articles by Leonard J. Mirman

Leonard J. Mirman

University of Virginia - Department of Economics

Marc Santugini

University of Virginia - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: March 28, 2014

Abstract

Building on Kihlstrom and Mirman (1974)’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer's maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision.

Keywords: Classical Demand Theory, Consumer Choice, Income and Substitution Effects, Risk Aversion

JEL Classification: D01, D81, D91

Suggested Citation

Mirman, Leonard J. and Santugini, Marc, On Risk Aversion, Classical Demand Theory, and KM Preferences (March 28, 2014). Journal of Risk and Uncertainty, Vol. 48, No. 1, 2014, Available at SSRN: https://ssrn.com/abstract=2417317

Leonard J. Mirman

University of Virginia - Department of Economics ( email )

1818 Winston Rd
Charlottesville, VA
United States

Marc Santugini (Contact Author)

University of Virginia - Department of Economics ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

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