Certainty Equivalent

It is the minimum amount of money that the economic agent is willing to accept, as an alternative to face a prospect of risk with uncertain results (such as a risky investment X). In the case of indifference to the risk of the economic operator, it corresponds with the present expected value of the asset and the following equality is tested: 

 
 
 

On the other way, when equality is not verified, the economic agent is adverse or risk-loving and therefore the certainty equivalent will be respectively less than or greater than the present expected value of the asset.

 

 

Bibliography

Hardaker J. B., Huirne R. B. M.,Coping with risk in Agriculture, CABI, 2004.

MIT OpenCourseWare, Microeconomic Theory III, Spring 2010.

 

Editor: Giuliano DI TOMMASO