Hyperbolic Absolute Risk Aversion

DEFINITION of 'Hyperbolic Absolute Risk Aversion'

A means of measuring risk avoidance via a mathematical equation. Hyperbolic absolute risk aversion is part of the family of utility functions originally proposed by John von Neumann and Oskar Morgenstern in the late 1940s. Like their other theorems, HARA assumes that investors are rational, which is expressed as a desire to maximize final payouts while mitigating risk.

BREAKING DOWN 'Hyperbolic Absolute Risk Aversion'

Similar to other mathematical utility and optimization methods, HARA provides a framework for investors to model different behaviors as well as assess the impact of various decisions. What's more, HARA can be used on a wide array of financial and non-financial problems. As with most mathematical methods, hyperbolic absolute risk aversion works best when one's investment objectives are clearly defined.

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