Editing Risk aversion (section)

===Implications of increasing/decreasing absolute and relative risk aversion===

The most straightforward implications of changing risk aversion occur in the context of forming a portfolio with one risky asset and one risk-free asset.<ref name="Arrow" /><ref name="Pratt" /> If an investor experiences an increase in wealth, he/she will choose to decrease the total amount of wealth invested in the risky asset in proportion to absolute risk aversion and will decrease the relative fraction of the portfolio made up of the risky asset in proportion to relative risk aversion. Thus economists avoid using utility functions which exhibit increasing absolute risk aversion, because they have an unrealistic behavioral implication.

In one [[economic model|model]] in [[monetary economics]], an increase in relative risk aversion increases the impact of households' money holdings on the overall economy. In other words, the more the relative risk aversion increases, the more money demand shocks will impact the economy.<ref>{{cite journal |last1=Benchimol |first1=Jonathan |last2=Fourçans |first2=André |title=Money and risk in a DSGE framework: A Bayesian application to the Eurozone |journal=Journal of Macroeconomics |date=March 2012 |volume=34 |issue=1 |pages=95–111 |doi=10.1016/j.jmacro.2011.10.003 |s2cid=153669907 }}</ref>