Risk Aversion and Expected-Utility Theory: A Calibration Theorem

Matthew Rabin

No E00-279, Economics Working Papers from University of California at 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. June 2000

Date: 2000-06-01
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Related works:
Working Paper: Risk Aversion and Expected Utility Theory: A Calibration Theorem (2001)
Working Paper: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2001)
Journal Article: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2000)
Working Paper: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2000)
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