Broadly Decreasing Risk Aversion
Gregory M. Gelles, Douglas W. Mitchell
Management Science · 1999 · Volume 45 · Issue 10
Abstract
This paper considers decision-making in the presence of two additive risk sources, with no restrictions on the relation between the two risks. A utility function is said to exhibit broad DARA if and only if a rise in wealth always decreases the magnitude of the risk premium for one of the risks vis-a-vis the other. A condition on utility functions giving this property is derived: utility must be of the linear plus exponential form. It is shown that certain problems involving portfolios and risk-averse firms give unambiguous comparative statics if and only if utility exhibits broad DARA.
Keywords
decision-making under risk, choice under uncertainty, two risk sources, risk premium, risk averse firm, portfolio choice
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