Risk Aversion and Expected-Utility Theory: Coherence for Small- and Large-Stakes Gambles
نویسندگان
چکیده
منابع مشابه
Small- and large-stakes risk aversion: Implications of concavity calibration for decision theory
A growing literature reports the conclusions that: (a) expected utility theory does not provide a plausible theory of risk aversion for both small-stakes and large-stakes gambles; and (b) this decision theory should be replaced with an alternative theory characterized by loss aversion. This paper explains that the arguments in previous literature fail to support these conclusions. Either concav...
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Many subjects in lab experiments show considerable risk aversion in small-stakes gambles. This is counter to the predictions of expected utility theory for any reasonable degree of risk aversion (Rabin 2000) but is consistent with loss aversion in prospect theory. Benjamin, Brown, and Shapiro (forthcoming) show that math skills reduce small-stakes risk aversion, consistent with broader evidence...
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Rabin [23] proved that a low level of risk aversion with respect to small gambles leads to a high level of risk aversion with respect to large gambles. Rabin’s arguments strongly depend on expected utility theory, but we show in this paper that similar arguments apply to many non expected utility theories, and to a certain extent, to theories dealing with uncertainty as well.
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A reasonable level of risk aversion with respect to small gambles leads to a high, and absurd, level of risk aversion with respect to large gambles. This was demonstrated by Rabin (Econometrica 68:1281–1292, 2000) for expected utility theory. Later, Safra and Segal (Econometrica 76:1143–1166, 2008) extended this result by showing that similar arguments apply to many non-expected utility theorie...
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