Anomalies: Risk Aversion
Matthew Rabin and
Journal of Economic Perspectives, 2001, vol. 15, issue 1, 219-232
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.
JEL-codes: D81 (search for similar items in EconPapers)
Note: DOI: 10.1257/jep.15.1.219
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Persistent link: https://EconPapers.repec.org/RePEc:aea:jecper:v:15:y:2001:i:1:p:219-232
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