Interpretations and Transformations of Scale for the Pratt-Arrow Absolute Risk Aversion Coefficient: Implications for Generalized Stochastic Dominance: Comment

ful paper dealing with several items relating to the Pratt-Arrow risk aversion coefficient (RAC). One aspect of that paper deals with the way that the RAC changes with respect to arithmetic manipulations of the outcome variable. In particular, the authors show the effects of multiplying and adding constants. This note takes issue with RC's statements regarding the addition of constants, i.e., their theorem 2. In turn, the implications of the criticisms in terms of RC's conclusions are explored. Theorem 2 in the RC article states that, given a utility function u(w) and its associated risk aversion function r(w), "If v = x +c where c is a constant, then r(v) = r(x). Therefore, the magnitude of the risk aversion coefficient is unaffected by the use of incremental rather than absolute returns... " (p. 207). The first part of the statement of the theorem i