Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter October 23, 2007

Decreasing Relative Risk Premium

  • Frank Hansen

We consider the risk premium demanded by a decision maker in order to be indifferent between obtaining a new level of wealth with certainty, or to participate in a lottery which either results in unchanged wealth or an even higher level than what can be obtained with certainty. We study preferences such that the corresponding relative risk premium is a decreasing function of present wealth, and we determine the set of associated utility functions. We find a new characterization of risk vulnerability and determine a large set of utility functions, closed under summation and composition, which are both risk vulnerable and have decreasing relative risk premium. We finally introduce the notion of partial risk neutral preferences on binary lotteries and show that partial risk neutrality is equivalent to preferences with decreasing relative risk premium.

Published Online: 2007-10-23

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston

Downloaded on 29.3.2024 from https://www.degruyter.com/document/doi/10.2202/1935-1704.1370/html
Scroll to top button