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Calibration without reduction for non-expected utility

David Freeman ()

Journal of Economic Theory, 2015, vol. 158, issue PA, 21-32

Abstract: Calibration results in Rabin (2000) and Safra and Segal (2008, 2009) suggest that both expected and non-expected utility theories cannot produce non-negligible risk aversion over small stakes without producing implausible risk aversion over large stakes. This paper provides calibration results for recursive non-expected utility theories that relax the Reduction of Compound Lotteries axiom (as in Segal, 1990). These calibration results imply that a broad class of non-expected utility theories can accommodate both small and large stakes risk aversion, even for a decision-maker who faces background risk.

Keywords: Risk aversion; Calibration; Non-expected utility theories; Recursive preferences (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2015
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