Abstract
We propose a reasonable condition, which we call repetitive risk aversion, to be imposed on any utility function to account for the observed data on the relationship between the degree of absolute risk aversion and wealth. This condition is shown to be equivalent to the behaviorally meaningful condition that the risk premium is increasing at a non-increasing rate with the size of the bet. We drive mixed risk aversion, which is known to be stronger than standard and thus proper risk aversion, from repetitive risk aversion. We present several economic applications of repetitive risk aversion to demonstrate that it delivers better comparative static results.
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