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Hyperbolic absolute risk aversion (HARA) is the most general class of utility functions that are usually used in practice (specifically, CRRA (constant relative risk aversion, see below), CARA (constant absolute risk aversion), and quadratic utility all exhibit HARA and are often used because of their mathematical tractability).
In finance, economics, and decision theory, hyperbolic absolute risk aversion (HARA) [1]: p.39, [2]: p.389, [3][4][5][6] refers to a type of risk aversion that is particularly convenient to model mathematically and to obtain empirical predictions from. It refers specifically to a property of von Neumann–Morgenstern utility functions, which ...
The isoelastic utility function is a special case of hyperbolic absolute risk aversion and at the same time is the only class of utility functions with constant relative risk aversion, which is why it is also called the CRRA utility function. In statistics, the same function is called the Box-Cox transformation.
The risk attitude is directly related to the curvature of the utility function: risk neutral individuals have linear utility functions, while risk seeking individuals have convex utility functions and risk averse individuals have concave utility functions. The degree of risk aversion can be measured by the curvature of the utility function ...
Under the expected utility framework, this can only be realised through high levels of risk aversion. Households place a greater weight on the probability that a claim will be made when choosing a policy, thus it is suggested that the reference point of the household significantly influences the decisions when it comes to premiums and deductibles.
Exponential utility implies constant absolute risk aversion (CARA), with coefficient of absolute risk aversion equal to a constant: ″ ′ =. In the standard model of one risky asset and one risk-free asset, [1] [2] for example, this feature implies that the optimal holding of the risky asset is independent of the level of initial wealth; thus on the margin any additional wealth would be ...
Risk aversion (psychology) Risk aversion is a preference for a sure outcome over a gamble with higher or equal expected value. Conversely, rejection of a sure thing in favor of a gamble of lower or equal expected value is known as risk-seeking behavior. The psychophysics of chance induce overweighting of sure things and of improbable events ...
Economics. In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function.