Abstract
We present a methodology that allows endogenous derivation of the moments of the probability distributions. In doing so, we, present an alternative objective function and alternative concept of risk aversion. In addition, we show that the risk measure depends on the preferences. Moreover, we show that a higher level of risk aversion yields higher values of the risk measure.
Highlights
In the absence of risk neutrality, probability measures have been subjectively determined by the individual
We show that a higher level of risk aversion yields higher values of the risk measure
According to the expected utility theory, the probability distributions are still determined exogenously and independently of the individual’s preferences, since preferences are determined by the form of the utility function [1]
Summary
In the absence of risk neutrality, probability measures have been subjectively determined by the individual. We present a methodology that allows endogenous derivation of the moments of the probability distributions. We, present an alternative objective function and alternative concept of risk aversion. We show that the risk measure depends on the preferences.
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