TY - JOUR

T1 - Relative risk aversion must be close to 1

AU - Levy, Moshe

N1 - Publisher Copyright:
© The Author(s) 2024.

PY - 2024

Y1 - 2024

N2 - Any utility function that is unbounded either from below or from above implies paradoxical behavior. However, these paradoxes may be regarded as irrelevant if they involve wealth levels that are realistically meaningless. Employing real-world constraints on wealth reveals that CRRA utility with relative risk aversion outside of the range 0.75–1.15 yields paradoxical choices that very few individuals, if any, would ever make. Thus, relative risk aversion must be close to 1, the value corresponding to log preferences. These results shed new light on the longstanding debate about the geometric-mean criterion and the argument of stocks for the long-run.

AB - Any utility function that is unbounded either from below or from above implies paradoxical behavior. However, these paradoxes may be regarded as irrelevant if they involve wealth levels that are realistically meaningless. Employing real-world constraints on wealth reveals that CRRA utility with relative risk aversion outside of the range 0.75–1.15 yields paradoxical choices that very few individuals, if any, would ever make. Thus, relative risk aversion must be close to 1, the value corresponding to log preferences. These results shed new light on the longstanding debate about the geometric-mean criterion and the argument of stocks for the long-run.

KW - Constant relative risk aversion (CRRA)

KW - D81

KW - G11

KW - Geometric mean

KW - Logarithmic utility function

KW - Stocks for the long-run

UR - http://www.scopus.com/inward/record.url?scp=85200577167&partnerID=8YFLogxK

U2 - 10.1007/s10479-024-06193-0

DO - 10.1007/s10479-024-06193-0

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AN - SCOPUS:85200577167

SN - 0254-5330

JO - Annals of Operations Research

JF - Annals of Operations Research

ER -