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Probabilistic risk attitudes and local risk aversion: a paradox

Vjollca Sadiraj ()

Theory and Decision, 2014, vol. 77, issue 4, 443-454

Abstract: Prominent theories of decision under risk that challenge expected utility theory model risk attitudes at least partly with transformation of probabilities. This paper shows how attributing local risk aversion to attitudes towards probabilities can produce extreme probability distortions that imply paradoxical risk aversion. Copyright Springer Science+Business Media New York 2014

Keywords: Risk aversion; Probability transformation; Calibration; Reference dependence (search for similar items in EconPapers)
Date: 2014
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Working Paper: Probabilistic Risk Attitudes and Local Risk Aversion: a Paradox (2012) Downloads
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DOI: 10.1007/s11238-013-9410-3

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Handle: RePEc:kap:theord:v:77:y:2014:i:4:p:443-454