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Contribution to Book
Defining the Mean-Preserving Spread: 3-pt versus 4-pt
Decision Making Under Risk and Uncertainty: New Models and Empirical Findings (1992)
  • Eric Bennett Rasmusen
  • Emmanuel Petrakis, University of Crete
Abstract
The standard way to define a mean-preserving spread is in terms of changes in the probability at four points of a distribution (Rothschild and Stiglitz [1970]). Our alternative definition is in terms of changes in the probability at just three points. Any 4-pt mean- preserving spread can be constructed from two 3-pt mean-preserving spreads, and any 3-pt mean-preserving spread can be constructed from two 4-pt mean- preserving spreads. The 3-pt definition is simpler and more often applicable. It also permits easy rectification of a mistake in the Rothschild-Stiglitz proof that adding a mean- preserving spread is equivalent to other measures of increasing risk.
Disciplines
Publication Date
April, 1992
Editor
John Geweke
Publisher
Kluwer
ISBN
0-7923-1904-4
Citation Information
Eric Bennett Rasmusen and Emmanuel Petrakis. "Defining the Mean-Preserving Spread: 3-pt versus 4-pt" AmsterdamDecision Making Under Risk and Uncertainty: New Models and Empirical Findings (1992)
Available at: http://works.bepress.com/rasmusen/17/