Preferences over risk changes in variance

Abstract

This paper studies the linkages between different aspects of preferences in the presence of risk increases of different degrees in the variance of consumption. We find that the effects on expected utility of risk increases in variance of consecutive degrees are in opposite directions. Applying this result to saving choice when either labour income or the interest rate is random, we obtain that the effects on the optimal level of saving of risk increases in variance of subsequent degrees are in opposite directions. Lastly, similar results are obtained for risk increases in the variance of the variance of consumption.