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A two-parameter model of dispersion aversion


  • Chambers, Robert G.
  • Grant, Simon
  • Polak, Ben
  • Quiggin, John


The idea of representing choice under uncertainty as a trade-off between mean returns and some measure of risk or uncertainty is fundamental to the analysis of investment decisions. In this paper, we show that preferences can be characterized in this way, even in the absence of objective probabilities. We develop a model of uncertainty averse preferences that is based on a mean and a measure of the dispersion of the state-wise utility of an act. The dispersion measure exhibits positive linear homogeneity, sub-additivity, translation invariance and complementary symmetry. Since preferences are only weakly separable in terms of these two summary statistics, the uncertainty premium need not be constant. We generalize the concept of decreasing absolute risk aversion. Further we derive two-fund separation and asset pricing results analogous to those that hold for the standard CAPM.

Suggested Citation

  • Chambers, Robert G. & Grant, Simon & Polak, Ben & Quiggin, John, 2014. "A two-parameter model of dispersion aversion," Journal of Economic Theory, Elsevier, vol. 150(C), pages 611-641.
  • Handle: RePEc:eee:jetheo:v:150:y:2014:i:c:p:611-641 DOI: 10.1016/j.jet.2013.08.004

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    References listed on IDEAS

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Robert G. Chambers & Margarita Genius & Vangelis Tzouvelekas, 2012. "A Supply-Response Model Under Invariant Risk Preferences," Working Papers 1209, University of Crete, Department of Economics.
    2. repec:eee:matsoc:v:87:y:2017:i:c:p:31-39 is not listed on IDEAS
    3. Chambers, Robert G. & Tzouvelekas, Vangelis, 2013. "Estimating population dynamics without population data," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 510-522.

    More about this item


    Uncertainty aversion; Mean utility; Dispersion of utility; Weak-separability; Two-fund separation; CAPM excess return formula;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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