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Multiple Risks and Mean-Variance Preferences

Department of Economics, University of Bielefeld, 33615 Bielefeld, Germany
Institute of Social Policy, University of Hannover, 30167 Hannover, Germany
teichner{at}wiwi.uni-bielefeld.de
wagener{at}sopo.uni-hannover.de

We analyze comparative static effects under uncertainty when a decision maker has mean-variance preferences and faces a generic, quasi-linear decision problem with both an endogenous risk and a background risk. In terms of mean-variance preferences, we fully characterize the effects of changes in the location, scale, and concordance parameters of the stochastic environment on optimal risk taking. Presupposing compatibility between the mean-variance and the expected-utility approach, we then translate these mean-variance properties into their analogues for von Neumann-Morgenstern utility functions.

Subject classifications: decision analysis; risk.
History: Received December 2006; revision received September 2008; accepted November 2008.