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Increasing Risk: Some Direct Constructions

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  • Machina, Mark J
  • Pratt, John W

Abstract

This article extends the classic Rothschild-Stiglitz characterization of comparative risk ("increasing risk") in two directions. By adopting a more general definition of "mean preserving spread" (MPS), 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. Copyright 1997 by Kluwer Academic Publishers

Suggested Citation

  • Machina, Mark J & Pratt, John W, 1997. "Increasing Risk: Some Direct Constructions," Journal of Risk and Uncertainty, Springer, vol. 14(2), pages 103-127, March.
    • Handle: RePEc:kap:jrisku:v:14:y:1997:i:2:p:103-27
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