Parametric characterizations of risk aversion and prudence

Summary. Our first main result says that whether one decision maker is more risk averse than another can be determined from their attitudes toward a given two-parameter family of risks. When all risks belong to this family, risk aversion can be compared even when initial wealth is random. Our second main result solves a long-standing problem in mean-variance analysis: what is the interpretation of the concavity of utility as a function of mean and variance? We show that in the case of normal distributions, this utility function is concave if and only if the agent has decreasing prudence. Received: July 29, 1996; revised: October 2, 1998