A two-parameter model of dispersion aversion

Chambers, Robert G., Grant, Simon, Polak, Ben and Quiggin, John (2014) A two-parameter model of dispersion aversion. Journal of Economic Theory, 150 1: 611-641. doi:10.1016/j.jet.2013.08.004


Author Chambers, Robert G.
Grant, Simon
Polak, Ben
Quiggin, John
Title A two-parameter model of dispersion aversion
Journal name Journal of Economic Theory   Check publisher's open access policy
ISSN 0022-0531
1095-7235
Publication date 2014-01-01
Year available 2013
Sub-type Article (original research)
DOI 10.1016/j.jet.2013.08.004
Open Access Status Not Open Access
Volume 150
Issue 1
Start page 611
End page 641
Total pages 31
Place of publication Maryland Heights, MO, United States
Publisher Academic Press
Language eng
Abstract The idea of representing choice under uncertainty as a trade-off between mean returns and some measure of risk or uncertainty is fundamental to the analysis of investment decisions. In this paper, we show that preferences can be characterized in this way, even in the absence of objective probabilities. We develop a model of uncertainty averse preferences that is based on a mean and a measure of the dispersion of the state-wise utility of an act. The dispersion measure exhibits positive linear homogeneity, sub-additivity, translation invariance and complementary symmetry. Since preferences are only weakly separable in terms of these two summary statistics, the uncertainty premium need not be constant. We generalize the concept of decreasing absolute risk aversion. Further we derive two-fund separation and asset pricing results analogous to those that hold for the standard CAPM.
Keyword CAPM excess return formula
Dispersion of utility
Mean utility
Two-fund separation
Uncertainty aversion
Weak-separability
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2014 Collection
School of Economics Publications
 
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