Mean Variance Vulnerability

Thomas Eichner

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Decision-Making and Behavioral Economics Risk and Portfolio Optimization Probability and Risk Models

Abstract

This paper transfers the concept of Gollier and Pratt's (Gollier, C., J. W. Pratt. 1996. Risk vulnerability and the tempering effect of background risk. Econometrica 64 1109–1123) risk vulnerability into mean variance preferences. Risk vulnerability is shown to be equivalent to the slope of the mean variance indifference curve being decreasing in mean and increasing in variance. Next, we introduce the notion of mean variance vulnerability to link the concepts of decreasing absolute risk aversion, risk vulnerability, properness, and standardness. All of the abovementioned concepts are characterized in terms of mean variance indifference curve properties and in terms of absolute risk measures.

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References

1958Liquidity Preference as Behavior Towards Risk 1990Precautionary Saving in the Small and in the Large 1989Precautionary Saving in the Small and in the Large 1991Standard Risk Aversion 1996Risk Vulnerability and the Tempering Effect of Background Risk 2016Two-Moment Decision Models and Expected Utility Maximization 1987Proper Risk Aversion 1983A characterization of the distributions that imply mean—Variance utility functions

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