Increasing Risk: Some Direct Constructions

JOURNAL OF RISK AND UNCERTAINTY, Vol 14 No 2

Posted: 30 Apr 1997

See all articles by Mark J. Machina

Mark J. Machina

University of California at San Diego

John W. Pratt

Harvard Business School

Abstract

This paper extends the classic Rothschild-Stiglitz characterization of comparative risk ("increasing risk") in two directions. By adopting a more general definition of "mean preserving spread," it provides a direct construction of a sequence of MPS's linking any pair of distributions that are ranked in terms of comparative risk. It also provides a direct, explicit construction of a zero- conditional-mean "noise" variable for any such pair of distributions. Both results are extended to the case of second order stochastic dominance.

JEL Classification: D81

Suggested Citation

Machina, Mark J. and Pratt, John W., Increasing Risk: Some Direct Constructions. JOURNAL OF RISK AND UNCERTAINTY, Vol 14 No 2. Available at SSRN: https://ssrn.com/abstract=3929

Mark J. Machina (Contact Author)

University of California at San Diego ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-2391 (Phone)
858-534-7040 (Fax)

John W. Pratt

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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