Showing papers on "Ambiguity aversion published in 1972"

Liquidity Preference and Risk Aversion with an Exponential Utility Function

Abstract: The plunger has never been a very popular figure in economic theory. Indeed, in his seminal paper on the subject, Tobin [4] introduced the portfolio behaviour subsequently termed " plunging" on one page, and spent the next few pages stating conditions which, among other things, preclude such behaviour. These conditions were: (1) that the utility of returns be described by a quadratic function, or (2) that the probability distribution of returns be a member of the class of two-parameter distributions. Feldstein [2] has recently shown, however, that the " proof " of the sufficiency of the latter condition depends upon a property enjoyed by only one such function, and, for the class as a whole, no definite statement about the convexity of the indifference curves can be made. In addition, a number of writers have complained that some properties of the quadratic render it a poor representation of a utility function (cf. [1], [2], and [3], among others). Thus, the rather queer behaviour of the plunger, once thought to be so easily ignored, appears to be with us still. However, this paper will show that undue concern over such behaviour is still unwarranted by producing a utility function which, like the quadratic, precludes the plunger while permitting the more reasonable forms of portfolio behaviour but which, unlike the quadratic, has satisfactory economic properties. We proceed by first defining the utility function and examinating some of its relevant properties. Expected utility is then defined and put into the proper form for analysis. Finally, the slope and rate of change of the slope of the indifference curves are derived.