A constant relative risk aversion (CRRA) location-scale function is derived, analysed, and demonstrated for modelling choice under uncertainty. The function contributes to further exploration of the location-scale condition in agricultural economics risk research. Such analysis has been infrequent in recent research because the well-known linear mean-variance function implicitly assumes constant absolute risk aversion (CARA). Examples demonstrate that the CARA mean-variance function produces substantially different results than the CRRA location-scale function. Further, the CRRA location-scale function produces results similar to direct expected utility maximisation with a CRRA utility function and normally distributed returns.
- Constant relative risk aversion
- Location-scale condition
- Mean-variance analysis
ASJC Scopus subject areas
- Agricultural and Biological Sciences (miscellaneous)
- Economics and Econometrics