Anomalies: Risk Aversion

Matthew Rabin and Richard H. Thaler

Journal of Economic Perspectives, 2001, vol. 15, issue 1, pages 219-232

Abstract: Economists ubiquitously employ a simple and elegant explanation for risk aversion: It derives from the concavity of the utility-of-wealth function within the expected-utility framework. We show that this explanation is not plausible in most applications, since anything more than economically negligible risk aversion over moderate stakes requires a utility-of-wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes. We present examples of how the expected-utility framework has misled economists, and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting.

Date: 2001
View list of references View citations in EconPapers

Downloads: (external link)
http://www.e-jep.org/archive/1501/15010219.pdf (application/pdf)
Access to full text is restricted to AEA members.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:aea:jecper:v:15:y:2001:i:1:p:219-232

Ordering information: This journal article can be ordered from
http://www.aeaweb.org/subscribe.html

Access Statistics for this article

Journal of Economic Perspectives is edited by David Autor

More articles in Journal of Economic Perspectives from American Economic Association
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().