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).
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