First-order risk aversion and non-differentiability (*)
First-order risk aversion happens when the risk premium a decision maker is willing to pay to avoid the lottery $t\cdot {\tilde \epsilon }, E[{\tilde \epsilon }]=0,$ is proportional, for small t, to t. Equivalently, $\partial \pi /\partial t\mid_{t=0^{+}}> 0.$ We show that first-order risk aversion is equivalent to a certain non-differentiability of some of the local utility functions (Machina [7]).
Year of publication: |
1996
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Authors: | Segal, Uzi ; Spivak, Avia |
Published in: |
Economic Theory. - Springer. - Vol. 9.1996, 1, p. 179-183
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Publisher: |
Springer |
Saved in:
Saved in favorites
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