Comparative Statics Under Uncertainty: The Case of Mean-Variance Preferences

14 Pages Posted: 10 Dec 2001

See all articles by Andreas Wagener

Andreas Wagener

Leibniz Universit├Ąt Hannover - Economics and Business Administration Area; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Vienna University of Economics and Business Administration

Abstract

We analyze the comparative statics of optimal decisions under uncertainty when preferences are represented by two-moment, mean-variance utility functions. We relate our findings to concepts for risk attitudes that have recently been proposed for the expected utility approach. In the two-parameter approach, a number of plausible comparative static effects already emerges under the assumption of decreasing absolute risk aversion (DARA). DARA is, however, not sufficient to determine comparative static effects when changes in background risks are considered. Instead, risk vulnerability, temperance and standardness imply, appropriately transferred to the mean-variance framework, the plausible effect that risk taking will be reduced if the riskiness of background risks increases.

Keywords: Mean-Variance Analysis, Background Risks, Comparative Statics

JEL Classification: D81, D10

Suggested Citation

Wagener, Andreas, Comparative Statics Under Uncertainty: The Case of Mean-Variance Preferences. Available at SSRN: https://ssrn.com/abstract=293183 or http://dx.doi.org/10.2139/ssrn.293183

Andreas Wagener (Contact Author)

Leibniz Universit├Ąt Hannover - Economics and Business Administration Area ( email )

Koenigsworther Platz 1
30167 Hannover
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Vienna University of Economics and Business Administration ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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