Another Type of Risk Aversion

Abstract

Abstract : A formulation is made incorporating the concept of 'size-of-risk' aversion into the process of selecting a utility function. This concept extends and complements normative observation of risk aversion, namely, that as wealth increases, many decisionmakers would feel that they ought to pay less insurance against a given risk. However, as the size of potential loss increases, decisionmakers are more averse to risk and would be willing to pay a larger premium. They display what is known as (positive) size-of-risk aversion. In selecting a utility function, both concepts should be considered.

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