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Handbook of the Economics of Risk and Uncertainty
book

Handbook of the Economics of Risk and Uncertainty

by Mark Machina, W. Kip Viscusi
November 2013
Beginner content levelBeginner
896 pages
35h 10m
English
North Holland
Content preview from Handbook of the Economics of Risk and Uncertainty
The Theory of Risk and Risk Aversion
109
Again this definition for φ(x, h) holds for all values for h. For small h, Arrow and Pratt
use a quadratic Taylor Series approximation to u(x + h) and u(x h) and show that the
probability premium is approximately given by:
As with the risk premium, the form of this result is that the decision maker’s reaction to
risk, φ(x, h), is proportional to the product of the strength or intensity of risk aversion
A
u
(x), and the size of the risk, in this case measured by h.
3.4.3 A-P Global Risk Aversion
The local and approximate findings discussed in Section 3.4.1 lend considerable intui-
tive appeal to A
u
(x) as a ...
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Publisher Resources

ISBN: 9780444536853