Friday, February 03, 2006

Risk Aversion

For the CRRA (constant relative risk aversion) utility: u(c)=c^(1-r)/1-r, we see that as r increases, risk aversion increases. A higher r means a more convace utility, thus a higher curvature of the utility function. Let's regard the utility function as a person. Doesn't it mean that if one has higher degree of risk aversion, he will bend more?

The more humility, the less risk.

I should always remember that.


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