STOCHASTIC

334 DRfeZE AND MOD1GLIANI
if the smaller y2 obtains. It will thus make things even brighter when they
would be bright anyway and even more dismal if the worse turns out,
hence it increases the variance of the outcome. 25 On this account then, if
there is risk aversion, c2 will be preferred to y2, and hence c/ will be
preferred to ^ . Or, to put it differently, uncertainty tends to increase
savings because the increase in savings has the effect of trimming the
uncertainty of the outcome.
But this "variance effect" is not the end of the story: In choosing between
the uncertain prospects {c2} and {yj, one must also compare their mean
values. 26 If y2 = |(