Rejecting Small Gambles Under Expected Utility

Ignacio Palacios-Huerta, Roberto Serrano and Oscar Volij ()

No 32, Economics Working Papers from Institute for Advanced Study, School of Social Science

Abstract: This paper contributes to an important recent debate around expected utility and risk aversion. Rejecting a gamble over a given range of wealth levels imposes a lower bound on risk aversion. Using this lower bound and empirical evidence on the range of the risk aversion coefficient, we calibrate the relationship between risk attitudes over small-stakes and large-stakes gambles. We find that rejecting small gambles is consistent with expected utility, contrary to a recent literature that concludes that expected utility is fundamentally unfit to explain decisions under uncertainty. Paradoxical behavior is only obtained when calibrations are made in a region of the parameter space that is not empirically relevant.

Keywords: Risk Aversion; Expected Utility (search for similar items in EconPapers)
JEL-codes: D00 D80 D81 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2003-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Rejecting small gambles under expected utility (2006)
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