Welcome to the hotseat. We've prepared a guide if you'd like to read more about how it works.

why does an iso-elastic utility curve allow for myopic decisions

0 votes
asked Mar 1 in BUS 4028F - Financial Economics by Luba (160 points)

If an investor's utility curve exhibits constant Relative Risk Aversion it is said to be iso-elastic. Such functions allow for myopic decisions to be made. Why? 

1 Answer

+1 vote
answered Mar 2 by adam (240 points)

If an investors utility function displays constant RRA this would imply he wants to make sure that the same proportion of his wealth is invested in risky assets as his wealth increases. Therefore the investor would be concerned about short term losses (ie myopic decisions ) as short term losses could affect the proportion he has invested in risky assets.