RISK AVERSION BEHAVIOR.
               RELATIONSHIPS BETWEEN RISK AVERSION,
                   PRUDENCE AND CAUTIOUSNESS

                                Pirtea Marilen, Professor PhD
                              West University de Vest of Timisoara
                                  marilen.pirtea@feaa.uvt.ro

                                      Boţoc Claudiu, Ec.
                              West University de Vest of Timisoara
                                   claudiu.botoc@feaa.uvt.ro


ABSTRACT: This paper defines decreasing absolute risk aversion in purely behavioral terms
without any assumption of differentiability and shows that a strictly increasing and risk
averse utility function with decreasing absolute risk aversion is necessarily differentiable with
an absolutely continuous derivative. A risk averse utility function has decreasing absolute risk
aversion if and only if it has a decreasing absolute risk aversion density, and if and only if the
cumulative absolute risk aversion function is increasing and concave. This leads to a
characterization of all such utility functions. Analogues of these results also hold for
increasing absolute and for increasing and decreasing relative risk aversion.

Keywords: risk aversion, prudence, cautiousness

JEL codes: G 32