Search results
Results From The WOW.Com Content Network
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).
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 ...
Hyperbolic absolute risk aversion. 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 ...
Prospect theory. Daniel Kahneman, who won the 2002 Nobel Memorial Prize in Economics for his work developing prospect theory. Prospect theory is a theory of behavioral economics, judgment and decision making that was developed by Daniel Kahneman and Amos Tversky in 1979. [1] The theory was cited in the decision to award Kahneman the 2002 Nobel ...
The Arrow–Pratt measure of relative risk aversion is: = ″ ′ Special classes of utility functions are the CRRA (constant relative risk aversion) functions, where RRA(w) is constant, and the CARA (constant absolute risk aversion) functions, where ARA(w) is constant. They are often used in economics for simplification.
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.
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.
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 ...