Risk Aversion and Expected-Utility Theory: A Calibration Theorem

Matthew Rabin

Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley

Abstract: Within the expected-utility framework, the only explanation for risk aversion is that the utility function for wealth is concave: A person has lower marginal utility for additional wealth when she is wealthy than when she is poor. This paper provides a theorem showing that expected-utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes: Within expected-utility theory, for any concave utility function, even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes. Illustrative calibrations are provided.

Keywords: Diminishing Marginal utility; expected utility; risk aversion (search for similar items in EconPapers)
Date: 2000-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (838)

Downloads: (external link)
https://www.escholarship.org/uc/item/731230f8.pdf;origin=repeccitec (application/pdf)

Related works:
Working Paper: Risk Aversion and Expected Utility Theory: A Calibration Theorem (2001)
Journal Article: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cdl:econwp:qt731230f8

Access Statistics for this paper

More papers in Department of Economics, Working Paper Series from Department of Economics, Institute for Business and Economic Research, UC Berkeley Contact information at EDIRC.
Bibliographic data for series maintained by Lisa Schiff ().