Alternative Views on the Link between Risk Aversion and Diminishing Marginal Utility of Wealth

Vojtěch Menzl

European Financial and Accounting Journal, 2021, vol. 2021, issue 2, 51-72

Abstract: Although the link between risk aversion and diminishing marginal utility of wealth is academically well established, theoretical discussions concerning its empirical validity remain. The presented, review-type paper aims to briefly examine theoretical roots responsible for the different views on this association in order to provide a broader perspective to alternative explanations. This latter task is assisted by comparative analysis of two recent pieces of research by Rick Falkenstein and Matthew Rabin; a duo of papers, handpicked at the author's discretion to demonstrate the convergence of alternative ideas from different authors (and backgrounds). In support of its argumentation, the paper also presents a critical overview of the equity premium puzzle as seen through the prism of behavioural finance. The main contributions of the paper include evidence-based support for the concept of relative utility and reconfirmation of the meaningful role of behavioural finance in economics and finance.

Keywords: Risk Aversion; Marginal Utility; Expected Utility; Behavioural Finance; Equity Premium Puzzle (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.18267/j.efaj.255

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