Risk Aversion under Preference Uncertainty

R.G.W. Kraeussl; A. Lucas; A.H. Siegmann

doi:10.1016/j.frl.2011.08.001

Risk Aversion under Preference Uncertainty

R.G.W. Kraeussl, A. Lucas, A.H. Siegmann

Research output: Contribution to Journal › Article › Academic › peer-review

Abstract

We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for optimal asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty. © 2011 Elsevier Inc..

Original language	English
Pages (from-to)	1-7
Journal	Finance Research Letters
Volume	9
Issue number	1
DOIs	https://doi.org/10.1016/j.frl.2011.08.001
Publication status	Published - 2012

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title = "Risk Aversion under Preference Uncertainty",

abstract = "We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for optimal asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty. {\textcopyright} 2011 Elsevier Inc..",

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AB - We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this result for optimal asset allocation: poor agents that are uncertain about their risk aversion parameter invest less in risky assets than wealthy investors with identical risk aversion uncertainty. © 2011 Elsevier Inc..

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JO - Finance Research Letters

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Risk Aversion under Preference Uncertainty

Abstract

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