Invariant risk attitudes

Concepts of constant absolute risk aversion and constant relative risk aversion have proved useful in the analysis of choice under uncertainty, but are quite restrictive, particularly when they are imposed jointly. A generalization of constant risk aversion, referred to as invariant risk aversion is developed. Invariant risk aversion is closely related to the possibility of representing preferences over state-contingent income vectors in terms of two parameters, the mean and a linearly homogeneous, translation-invariant index of riskiness. The best-known index with such properties is the standard deviation. The properties of the capital asset pricing model, usually expressed in terms of the mean and standard deviation, may be extended to the case of general invariant preferences.