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Mean utility preserving increases in risk for state dependent utility functions

✍ Scribed by Michel Demers

Publisher
Springer US
Year
1987
Tongue
English
Weight
654 KB
Volume
23
Category
Article
ISSN
0040-5833

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✦ Synopsis

This paper i defines the concept of a mean utility preserving spread across states (MUPSAS) for state dependent utility functions and analyzes the behavioural impact of shifts in the probability distribution of wealth across states such that overall mean utility is preserved. The main result provides an alternative way of ranking state dependent utility functions according to their degree of risk aversion (thus extending Karni's theorem of comparative risk aversion) and establishes a link between increases in risk and risk aversion for state dependent preferences. In a portfolio problem where preferences and the rate of return of the risky venture are state dependent, we find sufficient conditions to determine the impact of a MUPSAS on the optimal share of the portfolio invested in the risky asset.

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