Abstract

This article is an extension of Meyer and Sinn’s results on the representation of arbitrary von Neumann-Morgenstern functions in μ-σ space when the probability distributions to be compared belong to a linear distribution class. It shows that, when absolute risk aversion decreases, stays constant, or increases not too fast, an increase in σ, given μ, increases the indifference curve slope: increased riskiness increases the required marginal compensation for risk when risk is measured by the standard deviation of wealth or income.