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http://dspace.mediu.edu.my:8181/xmlui/handle/10261/3137| Title: | Improving the Risk Concept: A Revision of Arrow-Pratt Theory in the Context of Controlled Dynamic Stochastic Environments |
| Keywords: | Controlled dynamic stochastic system Optimal trajectory Closed-loop strategy Feedback-and-forward information Rational decision-maker Dynamic learning Endogenous risk-aversion Adaptive risk management Optimal risk-aversion threshold Excessive risk-averse behavior Risk perception Changing risk behavior |
| Description: | Submitted for publication to 'The Economic Journal'. In the literature on risk, one generally assume that uncertainty is uniformly distributed over the entire working horizon, when the absolute risk-aversion index is negative and constant. From this perspective, the risk is totally exogenous, and thus independent of endogenous risks. The classic procedure is "myopic" with regard to potential changes in the future behavior of the agent due to inherent random fluctuations of the system. The agent's attitude to risk is rigid. Although often criticized, the most widely used hypothesis for the analysis of economic behavior is risk-neutrality. This borderline case must be envisaged with prudence in a dynamic stochastic context. The traditional measures of risk-aversion are generally too weak for making comparisons between risky situations, given the dynamic complexity of the environment. This can be highlighted in concrete problems in finance and insurance, context for which the Arrow-Pratt measures (in the small) give ambiguous results (see Ross, 1981). This article is based on research undertaken with support from the European Community's PHARE ACE Programme 1998 under grant P98-2103-S. Peer reviewed |
| URI: | http://dspace.mediu.edu.my:8181/xmlui/handle/10261/3137 |
| Other Identifiers: | http://hdl.handle.net/10261/3137 |
| Appears in Collections: | Digital Csic |
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