Risk aversion for nonsmooth utility functions (Q553517)

The notion of risk aversion plays a quite large role in characterizing investor preferences. This paper generalizes the notion of risk aversion for functions which are not necessarily differentiable nor strictly concave. Using an approach based on superdifferentials, the authors define the notion of a risk aversion measure, from which the classical absolute as well as relative risk aversion follows as a Radon-Nikodym derivative if it exists. Using this notion, we are able to compare risk aversions for nonsmooth utility functions, and to extend a classical Pratt's result to the case of such functions. The authors prove how relative risk aversion is connected to a super-power property of the function. Furthermore, they show how boundedness of the relativwe risk aversion translates to the corresponding property of the conjugate function. In addition, the authors propose a weaker ordering of the risk aversion, which requires only that bounds of the absolute or relative risk aversion hold up to a certain tolerance.