First-order risk aversion and non-differentiability (*)

First-order risk aversion happens when the risk premium a decision maker is willing to pay to avoid the lottery $t\cdot {\tilde \epsilon }, E[{\tilde \epsilon }]=0,$ is proportional, for small t, to t. Equivalently, $\partial \pi /\partial t\mid_{t=0^{+}}> 0.$ We show that first-order risk aversion is equivalent to a certain non-differentiability of some of the local utility functions (Machina [7]).

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Year of publication:	1996
Authors:	Segal, Uzi ; Spivak, Avia
Published in:	Economic Theory. - Springer. - Vol. 9.1996, 1, p. 179-183
Publisher:	Springer

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Type of publication:	Article
Notes:	Received: June 26, 1995; revised version November 20, 1995
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005147327