Risk Aversion and Expected Utility of Consumption over Time

Olof Johansson-Stenman ()

No 351, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: The calibration theorem by Rabin (2000) implies that seemingly plausible smallstake choices under risk imply implausible large-stake risk aversion. This theorem is derived based on the expected utility of wealth model. However, Cox and Sadiraj (2006) show that such implications do not follow from the expected utility of income model. One may then wonder about the implications for more applied consumption analysis. The present paper therefore expresses utility as a function of consumption in a standard life cycle model, and illustrates the implications of this model with experimental small- and intermediate-stake risk data from Holt and Laury (2002). The results suggest implausible risk aversion parameters as well as unreasonable implications for long term risky choices. Thus, the conventional intertemporal consumption model under risk appears to be inconsistent with the data.

Keywords: Expected utility of income; expected utility of final wealth; dynamic consumption theory; asset integration; time inconsistency; narrow bracketing (search for similar items in EconPapers)
JEL-codes: D81 D91 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2009-04-06
New Economics Papers: this item is included in nep-ltv and nep-upt
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Citations: View citations in EconPapers (4)

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Journal Article: Risk aversion and expected utility of consumption over time (2010)
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