Background risk and small-stakes risk aversion

Xiaosheng Mu, Luciano Pomatto, Philipp Strack () and Omer Tamuz

Papers from arXiv.org

Abstract: We show that under plausible levels of background risk, no theory of choice under risk -- such as expected utility theory, prospect theory, or rank dependent utility -- can simultaneously satisfy the following three economic postulates: (i) Decision makers are risk-averse over small gambles, (ii) they respect stochastic dominance, and (iii) they account for background risk.

Date: 2020-10, Revised 2021-03
New Economics Papers: this item is included in nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2010.08033

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