Increased Risk Aversion and Risky Investment

Abstract

This article investigates the relationship between the size of investment in a risky asset and the degree of risk aversion. The necessary and sufficient conditions are established that permit the prediction of whether agents with differing degrees of risk aversion will increase or decrease investment in the risky asset. It shows, in particular, that when the marginal return to investment decreases (increases) with an improvement in the state of nature, greater risk aversion will induce higher (lower) investment.

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