>Do you seriously find this exercise helpful? Couldn't you just as >easily back out the (von Neumann-Morgenstern, I presume) utility >function you need to get an introspectively plausible answer? In other >words, if you feel nervous with a SD of 20% of the mean, could looking >at utility functions really make you feel better about it?
Well this is a tad embarrassing. I thought I was using "standard" values for the coefficient of relative risk aversion, but had messed up its definition so that I was actually using values that were very very low. Using a CRRA of 3, a reduction in the standard deviation of income from 20% to 10% gives an increase in utility equivalent to about a 7.5% increase in income (RV is a normal truncated and + or - 3). Sound more reasonable? However, this does drop off rapidly as you decrease the CRRA. For example, with a value of 1 (the commonly used log utility) it only takes a 1.7% increase in your income to compensate you for an increase in the standard deviation from 10 to 20% of your income. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
