utility function and/or distribution of random payoff, EU theory derives a MS function such
∫+∞
∞
u (π) dF (π) = V (σ, μ), where
denotes random payoff, u (π) is a vNM utility
function, F (π) is a cumulative distribution function of π, V (σ, μ) is the derived MS function
and μ and σ denote the mean and the standard deviation of π, respectively. A positive
linear transformation of the vNM utility function derives the relationship,
∫{
-∞
au(π) + b}dF(π) = aV(σ, μ) + b (a > 0), which indicates the following result.
Proposition 1 (Cardinal property)
If MS approach is explained within EU theory, then the MS function is also cardinal that is
transformable only by a positive linear function.
Secondly, Sinn (1983) and Meyer (1987) translated under LS condition the EU-based
behavioral hypothesis such as vNM utility’s curvature and Arrow-Pratt’s measures of risk
aversion into appropriates analogues of MS approach.
Proposition 2 (Behavioral hypothesis)
Property 1 Vμ (σ, μ) > 0 if and only if Uπ (π)> 0.
Property 2 Vσ (σ, μ) < 0 ( = 0 ) if and only if Uππ (π) < 0 ( = 0 )
Property 3 The slope of the indifference curve of V ( σ, μ ), denoted
as S (σ, μ) = -Vσ (σ, μ)∣Vμ (σ, μ), is positive (zero) if the agent is risk-averse (risk-neutral).
Property 4 V (σ, μ) is concave if and only if Uπ (π) > 0 and Uππ (π) ≤ 0 .
Property 5 Sμ (σ, μ) < 0 (= 0, > 0) if and only if absolute risk aversion is decreasing (constant,
increasing).
Property 6 St (tσ,tμ) < 0(=0,>0) if and only if relative risk aversion is decreasing (constant,
increasing).
More intriguing information
1. The name is absent2. How much do Educational Outcomes Matter in OECD Countries?
3. DIVERSITY OF RURAL PLACES - TEXAS
4. Accurate, fast and stable denoising source separation algorithms
5. The name is absent
6. For Whom is MAI? A theoretical Perspective on Multilateral Agreements on Investments
7. The name is absent
8. Large Scale Studies in den deutschen Sozialwissenschaften:Stand und Perspektiven. Bericht über einen Workshop der Deutschen Forschungsgemeinschaft
9. Does Competition Increase Economic Efficiency in Swedish County Councils?
10. Insecure Property Rights and Growth: The Roles of Appropriation Costs, Wealth Effects, and Heterogeneity