Theories of decision under risk that assume decreasing marginal utility of money have been critiqued with concavity calibration arguments. Since that critique uses varying payoffs and fixed probabilities, it cannot have implications for calibration of nonlinear probability transformation, which is another way to model risk aversion. The concavity calibration critique also has no implication for...

Epidemiologists have long regarded relative risk (RR) as a key measure of association between two binary variables. Yet even when the sample is representative of the population, associations having a RR > 9 may have a relatively small value for Phi (φ < .3). This paper provides additional reasons for using RR instead of φ. (1) Formulas relating φ and RR are derived. A relative φ is constructed;...

This paper investigates a supply chain consisting of single risk-neutral supplier and risk-averse retailer with the call option contract service requirement, where retailer’s objective is to maximize Conditional Value-at-Risk about profit. The optimal ordering quantity production are derived in presence requirement. Furthermore, by investigating effect level risk aversion on chain, it found tha...

This paper considers the estimation of parameters in a dynamic stochastic model for securities prices, where the expected rate of return is a random variable. An empirical Bayes estimator is developed from the model structure. The estimator is an improvement on other popular estimators in terms of mean squared error. The e ect of reduced estimation error on accumulated wealth is analyzed for th...

Relative risk aversion (RRA) of consumption (RRAC) differs from RRA of wealth (RRAW) is an empirical fact explained in the study of Meyer and Meyer (2005). However dynamic consumption/ investment problems are only solved in the finance literature when both RRA equal (RRAC = RRAW). Following the martingale route, we derive optimal consumption and investment solutions for a (CRRA) investor when b...

In this article we consider the infinite-horizon Merton investment-consumption problem in a constant-parameter Black–Scholes–Merton market for an agent with constant relative risk aversion R. The classical primal approach is to write down candidate value function and use verification argument prove that solution problem. However, features of take it outside standard settings stochastic control,...

We estimate the distribution of risk preferences using a large data set of deductible choices in auto insurance contracts. To do so, we develop a structural econometric model of adverse selection that allows for unobserved heterogeneity in both risk (claim rate) and risk aversion. We use data on realized claims to estimate the distribution of claim rates and data on deductible and premium choic...

This paper examines the relationship between two types of preference: preference of intertemporal choices and preference towards risk. In the simplest form of the constant relative risk aversion utility function, the intertemporal elasticity of substitution (IES) and risk aversion has an inverse relationship. However, there is no empirical evidence that suggests this inverse relationship holds....

This paper presents an equilibrium model of the term structure of interest rates when investors have heterogeneous preferences. The basic model considers a pure exchange economy of two classes of investors with different (but constant) relative risk-aversion and gives closed-form solutions to bond prices. We sue the model to examine the effect of preference heterogeneity on the behavior of bond...