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Resolving Rabin’s paradox

Han Bleichrodt, Jason N. Doctor, Yu Gao, Chen Li, Daniella Meeker and Peter Wakker
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Han Bleichrodt: Erasmus University Rotterdam
Jason N. Doctor: University of Southern California
Yu Gao: Peking University
Chen Li: Erasmus University Rotterdam
Daniella Meeker: University of South California

Journal of Risk and Uncertainty, 2019, vol. 59, issue 3, No 2, 239-260

Abstract: Abstract We present a theoretical model of Rabin’s famous calibration paradox that resolves confusions in the literature and that makes it possible to identify the causes of the paradox. Using suitable experimental stimuli, we show that the paradox truly violates expected utility and that it is caused by reference dependence. Rabin already showed that utility curvature alone cannot explain his paradox. We, more strongly, do not find any contribution of utility curvature to the explanation of the paradox. We find no contribution of probability weighting either. We conclude that Rabin’s paradox underscores the importance of reference dependence.

Keywords: Rabin’s paradox; Reference dependence; Loss aversion; Prospect theory; D81; D03; C91 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s11166-019-09318-0

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