Production decisions based on absolute vs. relative risk aversion and their extensions

• In this paper we compare the two basic risk preference measures suggested independently by John W. Pratt (1964) and Kenneth J. Arrow (1965) as to their impact on simple production decisions with uncertain economic outcomes. We develop a further related concept by introducing a risk aversion leverage measuring the dependence of absolute risk aversion on wealth. We also discover a remarkable approximate relation between risk aversion measures of different leverages making the corresponding risk preference functions similar and leading to a method for estimating different Certainty Monetary Equivalents using zero-leverage expressions. We concentrate on three simple cases of production decisions of the Newsboy type.

Ämnesord

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economics (hsv//eng)

Nyckelord

Risk aversion; Risk aversion leverage; Newsboy problem; Certainty monetary equivalent; Net present value; Internal risk aversion; Arrow-Pratt; CME; NPV; IRA

Publikations- och innehållstyp

ref (ämneskategori)

art (ämneskategori)