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Risk aversion under preference uncertainty
Authors:Roman Kräussl  André Lucas  Arjen Siegmann
Affiliation:1. Vrije Universiteit Amsterdam, Faculty of Economics and Business Administration, Department of Finance, De Boelelaan 1105, 1081 HV, The Netherlands;2. Duisenberg School of Finance, The Netherlands;3. Tinbergen Institute, The Netherlands;1. Department of Physics, University of Avignon, Avignon 84000, France;2. Mediterranean Environment and Agro-Hydro System Modelisation Laboratory, French National Institute for Agricultural Research, Avignon 84914, France;1. “Simion Stoilow” Institute of Mathematics of the Romanian Academy, P.O. Box 1-764, RO-014700, Bucharest, Romania;2. CRAN–CNRS UMR 7039, Universite de Lorraine, France;1. School of Business administration, The College of Management Academic Studies, 7 Rabin Ave., Rishon-Le’Zion, Israel;2. Department of Economics, The Western Galilee College, P.O.B. 2125, Akko 24121, Israel;3. Department of Economics, Ben-Gurion University, Beer-Sheva 84105, Israel;1. Center for Complex Systems, Department of Automatic Control Engineering, Xidian University, Xi’an 710071, China;2. Center for Systems and Control, State Key Laboratory for Turbulence and Complex Systems, College of Engineering, Peking University, Beijing 100871, China;1. School of Automation, Guangdong University of Technology, China;2. Guangdong Key Laboratory of IoT Information Processing, Guangzhou 510006, China;3. The Key Lab for IoT and Information Fusion Technology of Zhejiang, Institute of Information and Control, Hangzhou Dianzi University, Hangzhou 310018, China;4. The State Key Laboratory of Industrial Control Technology, Institute of Cyber-Systems and Control, Zhejiang University, Yuquan Campus, Hangzhou, Zhejiang 310027, China
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.
Keywords:
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