What Is Constant Absolute Risk Aversion?

Constant absolute risk aversion, or CARA, utility is a class of utility functions. Also called exponential utility. Has the form, for some positive constant a:

u(c)=-(1/a)e-ac

"Under this specification the elasticity of marginal utility is equal to -ac, and the instantaneous elasticity of substitution is equal to 1/ac."

The coefficient of absolute risk aversion is a; thus the abbreviation CARA for Constant Absolute Risk Aversion.

"Constant absolute risk aversion is usually thought of as a less plausible description of risk aversion than constant relative risk aversion" (that's the CRRA), but it can be more analytically convenient. (Econterms)

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