Concavity, Stochastic Utility, and Risk Aversion
25 Pages Posted: 30 Jan 2020
Date Written: January 2, 2020
This paper studies the relation between concavity, stochastic or state dependent utility functions, and risk aversion. Using the common definition of risk aversion, but modified for state dependent preferences, we show that concavity does not imply risk aversion. Instead, it implies a weaker version of risk aversion, defined herein, and called risk aversion for independent gambles. Furthermore, to characterize the economic meaning of concavity, we define two new risk aversion notions, called uniform risk aversion and uniform risk aversion for independent gambles, respectively. We show that concavity is equivalent to uniform risk aversion for independent gambles, and that concavity plus some additional conditions are equivalent to uniform risk aversion.
Keywords: State Dependent Utility; Stochastic Utility; Risk Aversion; Uniform
JEL Classification: D11, G40, D81
Suggested Citation: Suggested Citation