Samuelson's Fallacy of Large Numbers With Decreasing Absolute Risk Aversion

Karl Whelan ()

No 19319, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Samuelson (1963) conjectured that accepting multiple independent gambles you would reject on a stand-alone basis violated expected utility theory. Ross (1999) and others presented examples where expected utility maximizers would accept multiple gambles that would be rejected on a stand-alone basis once the number of gambles gets large enough. We show that a stronger result than Samuelson's conjecture applies for DARA preferences over wealth. Expected utility maximizers with DARA preferences have threshold levels of wealth such that those above the threshold will accept N positive expected value gambles while those below will not and these thresholds are increasing with N.

Keywords: Risk; aversion (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2024-08
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Working Paper: Samuelson's Fallacy of Large Numbers With Decreasing Absolute Risk Aversion (2024)
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