Elliptical Symmetry, Expected Utility, And Mean-Variance Analysis

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Elliptical Symmetry, Expected Utility, And Mean-Variance Analysis

Author Info

Nelson, Carl H.
Ndjeunga, Jupiter

Abstract

Mean-variance analysis in the form of risk programming has a long, productive history in agricultural economics research. And risk programming continues to be used despite well known theoretical results that choices based on mean-variance analysis are not consistent with choices based on expected utility maximization. This paper demonstrates that the multivariate distribution of returns used in risk programming must be elliptically symmetric in order for mean-variance analysis to be consistent with expected utility choices. Then a statistical test for elliptical symmetry is developed and demonstrated. This test enables researchers to determine when data will produce significant differences between risk programming choices and expected utility choices.

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Paper provided by University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics in its series ACE Reports with number 14795.

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Date of creation: 1997
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Handle: RePEc:ags:uiucar:14795

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Meyer, Jack & Rasche, Robert H, 1992. "Sufficient Conditions for Expected Utility to Imply Mean-Standard Deviation Rankings: Empirical Evidence Concerning the Location and Scale Condition," Economic Journal, Royal Economic Society, vol. 102(410), pages 91-106, January. [Downloadable!] (restricted)
Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March. [Downloadable!] (restricted)
Chalfant, James A. & Collender, Robert N. & Subramanian, Shankar, 1989. "The mean and variance of the mean-variance decision rule," CUDARE Working Paper Series 466, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy, revised 1989.
Meyer, Jack, 1987. "Two-moment Decision Models and Expected Utility Maximization," American Economic Review, American Economic Association, vol. 77(3), pages 421-30, June. [Downloadable!] (restricted)

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This page was last updated on 2009-11-26.

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