Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size

Helga Fehr-Duda (), Adrian Bruhin (), Thomas Epper and Renate Schubert ()
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Helga Fehr-Duda: Institute of Economic Research, Swiss Federal Institute of Technology Zurich
Renate Schubert: Institute of Economic Research, Swiss Federal Institute of Technology Zurich

No 708, SOI - Working Papers from Socioeconomic Institute - University of Zurich

Abstract: How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory.

Keywords: Risk Aversion; Stake-Size Effect; Prospect Theory; Latent Heterogeneity (search for similar items in EconPapers)
JEL-codes: C91 D81 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2007-07, Revised 2008-02
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published in Journal of Risk and Uncertainty 40(2), pp. 147-180, 2010

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https://www.zora.uzh.ch/id/eprint/52378/1/wp0708.pdf Revised version, 2008 (application/pdf)

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Journal Article: Rationality on the rise: Why relative risk aversion increases with stake size (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:soz:wpaper:0708

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