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Hammitt, James K.
(2022)
Downside Risk Aversion vs Decreasing Absolute Risk Aversion : an Intuitive Exposition.
TSE Working Paper, n. 22-1359, Toulouse
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Abstract
Downside risk aversion (downside RA) and decreasing absolute risk aversion (DARA) are different concepts that describe preferences for which the harm from bearing risk is lessened by an increase in wealth. This note presents some intuitive explanations of the difference between the two concepts using simple lotteries and graphical analysis. All risk-averse utility functions exhibit downside risk aversion, except those that exhibit sufficiently strong increasing absolute risk aversion (IARA). In a sense, downside RA is to be expected: adding downside risk to a baseline lottery is analogous to increasing risk while adding upside risk is analogous to decreasing risk. The difference between the two concepts can be attributed to the use of different measures of the harm from risk bearing: downside RA measures harm using the utility premium and DARA measures harm using the risk premium. The two premia can change at different rates and even in different directions as wealth increases.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Language: | English |
| Date: | September 2022 |
| Place of Publication: | Toulouse |
| Uncontrolled Keywords: | risk aversion, prudence, risk apportionment, utility premium |
| Subjects: | B- ECONOMIE ET FINANCE |
| Divisions: | TSE-R (Toulouse) |
| Institution: | Université Toulouse 1 Capitole |
| Site: | UT1 |
| Date Deposited: | 20 Sep 2022 08:53 |
| Last Modified: | 17 Mar 2023 14:05 |
| OAI Identifier: | oai:tse-fr.eu:127311 |
| URI: | https://publications.ut-capitole.fr/id/eprint/46277 |
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