Risk aversion and expected-utility theory: A calibration exercise

Laura Schechter

Journal of Risk and Uncertainty, 2007, vol. 35, issue 1, 67-76

Abstract: Rabin (Econometrica 68(5):1281–1292, 2000 ) argues that, under expected-utility, observed risk aversion over modest stakes implies extremely high risk aversion over large stakes. Cox and Sadiraj (Games Econom. Behav. 56(1):45–60, 2006 ) have replied that this is a problem of expected-utility of wealth, but that expected-utility of income does not share that problem. We combine experimental data on moderate-scale risky choices with survey data on income to estimate coefficients of relative risk aversion using expected-utility of consumption. Assuming individuals cannot save implies an average coefficient of relative risk aversion of 1.92. Assuming they can decide between consuming today and saving for the future, a realistic assumption, implies quadruple-digit coefficients. This gives empirical evidence for narrow bracketing. Copyright Springer Science+Business Media, LLC 2007

Keywords: Expected utility theory; Asset integration; Risk aversion; Experiments; Paraguay; D01; D81; O1; C93 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (47)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11166-007-9017-6 (text/html)
Access to full text is restricted to subscribers.

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: https://EconPapers.repec.org/RePEc:kap:jrisku:v:35:y:2007:i:1:p:67-76

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11166/PS2

DOI: 10.1007/s11166-007-9017-6

Access Statistics for this article

Journal of Risk and Uncertainty is currently edited by W. Kip Viscusi

More articles in Journal of Risk and Uncertainty from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().