Hyperbolic Absolute Risk Aversion

Hyperbolic Absolute Risk Aversion (HARA) assumes that all investors are rational: they want to maximize their profits while minimizing their risk. See: Sharpe Ratio.

HARA is a mathematical model for risk aversion that economists and financial analysis use as a base to analyze a ton of problems and puzzles...really, anything that has to do with people wanting to avoid risk.

Since HARA has its assumptions, it’s less a way to predict or measure reality, and more of a place to start to understand human behavior as it relates to risk aversion. In the finance realm, HARA can be combined with the capital asset pricing model (CAPM), a model that compares risk with expected returns for securities.