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What is hyperbolic absolute risk aversion?

Hyperbolic absolute risk aversion

Hyperbolic absolute risk aversion (HARA) uses mathematic modelling to measure risk avoidance.

Where have you heard about hyperbolic absolute risk aversion?

Hyperbolic absolute risk aversion is widely used in the fields of finance, economics and decision theory. It was proposed by mathematician John von Neumann and economist Oskar Morgenstern in the 1940s and is one of several utility functions, which measure preferences over a set of goods and services.

What you need to know about hyperbolic absolute risk aversion.

It analyses behaviour such as responses to perceived risk and the impact of various decisions, to make predictions about future decisions.

Hyperbolic absolute risk aversion assumes that investors are rational with a desire to maximise profits and limit risk exposure.

If an investor’s deemed to have a high risk tolerance it’s likely they’ll invest more in risky assets, where their exposure to loss is higher, than an investor who has a lower risk tolerance and favours riskless assets.

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