CERTAINTY EQUIVALENT

It is the minimum amount of money that the economic agent is willing to accept (E), as an alternative to face a prospect of risk with uncertain outcomes of a risky investment (X).

If the economic operator is risk neutral (indifference to risk), it equals the present expected value of the asset

 

 
On the other way, when the equality is not verified, the economic agent is risk 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 - ASSONEBB