1. Risk and Probability Premiums for Cara Utility Functions
- Author
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Bruce A. Babcock, E. Kwan Choi, and Eli Feinerman
- Subjects
cara utility ,probability premiums ,risk aversion ,risk premiums ,Agriculture - Abstract
The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.
- Published
- 1993
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