Ordering Utility Functions based on Mean-Seeking Behavior
We consider utility function partial orderings to predict comparative portfolio features with two risky assets. No utility ordering can predict comparative holdings of the riskier asset for any reasonable definition of the latter. We thus reinterpret results of Arrow-Pratt and Ross as predicting comparative mean-seeking behavior. We also present a stronger utility ordering which predicts comparative portfolio means with no joint distribution restrictions. Thus we present a progression of contexts, with successively more relaxed distributional restrictions and hence successively stronger restrictions on utility function pairs, in which comparative mean-seeking behavior (not comparative risk avoidance) is predictable.
Gelles, G. M., & Mitchell, D. W. (1999). Ordering Utility Functions based on Mean-Seeking Behavior. Quarterly Review of Economics and Finance, 39(3), pp. 317-328. Elsevier Science Inc..
Keywords and Phrases
Comparative portfolio analysis; Riskier asset; Strong risk aversion; Utility function; Utility ordering
International Standard Serial Number (ISSN)
Article - Journal
© 1999 University of Illinois at Urbana-Champaign, Bureau of Economic and Business Research, All rights reserved.
01 Sep 1999