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A Reexamination of the Relationship Between Preferences and Moment Orderings by Rational Risk-Averse Investors

Listed author(s):
  • Patrick L. Brockett


    (Graduate School of Business, Department of Management Science and Information Systems, University of Texas, Austin, TX 78712.)

  • James R. Garven


    (Department of Finance, E.J. Ourso College of Business Administration, Louisiana State University, Baton Rouge, LA 70803.)

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    This article examines the relationship between risk, return, skewness, and utility-based preferences. Examples are constructed showing that, for any commonly used utility function, it is possible to have two continuous unimodal random variables X and Y with positive and equal means, X having a larger variance and lower positive skewness than Y, and yet X has larger expected utility than Y, contrary to persistent folklore concerning U‴ > 0 implying skewness preference for risk averters. In additon, it is shown that ceteris paribus analysis of preferences and moments, as occasionally used in the literature, is impossible since equality of higher-order central moments implies the total equality of the distributions involved. The Geneva Papers on Risk and Insurance Theory (1998) 23, 127–137. doi:10.1023/A:1008674127340

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    Article provided by Palgrave Macmillan & International Association for the Study of Insurance Economics (The Geneva Association) in its journal The Geneva Papers on Risk and Insurance Theory.

    Volume (Year): 23 (1998)
    Issue (Month): 2 (December)
    Pages: 127-137

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    Handle: RePEc:pal:genrir:v:23:y:1998:i:2:p:127-137
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