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An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty
An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty
An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty
An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty
28May
Finance

An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty

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Speaker:

Professor Hengjie Ai
Professor of Finance
Robert M. Steiner Chair in Business
Wisconsin School of Business
University of Wisconsin-Madison

Abstract:

This paper develops a theory of the elasticity of preference for early resolution of uncertainty (PER) that parallels the Arrow-Pratt measure of risk aversion in expected utility theory. We demonstrate that the local welfare gain of early resolution of uncertainty is equal to the product of the elasticity of PER and the conditional variance of continuation utility. We illustrate how asset market data can be used to estimate the elasticity of PER and how this measure can be used to compute the welfare gain for various experiments of early resolution of uncertainty.

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An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty
About Speaker
Hengjie Ai

Professor of Finance | ​Robert M. Steiner Chair in Business | Wisconsin School of Business | University of Wisconsin-Madison

An Arrow-Pratt Theory of Preference for Early Resolution of Uncertainty
28 May 2025
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