EN
IT
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
E [U (X)] = U [E (X)]
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.
E [U (X)]<U [E (X)] Risk adversion
E [U (X)]>U [E (X)] Risk-loving
Bibliography
HARDAKER J. B. and HUIRNE R. B. M., Coping with risk in Agriculture, CABI, 2004.
MIT OpenCourseWare, Microeconomic Theory III, Spring 2010.
