Hammitt, James K. (2022) Downside risk aversion vs decreasing absolute risk aversion: an intuitive exposition. Theory and Decision.

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Identification Number : 10.1007/s11238-022-09911-x


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. 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: Article
Language: English
Date: 4 October 2022
Refereed: Yes
Place of Publication: New York
Uncontrolled Keywords: Risk aversion, Prudence, Risk apportionment, Utility premium
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 03 Feb 2023 13:55
Last Modified: 21 Mar 2023 09:20
OAI Identifier: oai:tse-fr.eu:127764
URI: https://publications.ut-capitole.fr/id/eprint/46746

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