Risk Aversion and Expected-Utility Theory: A Calibration Theorem

Matthew Rabin

Method and Hist of Econ Thought from University Library of Munich, Germany

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.

JEL-codes: B49 D11 D81 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2001-01-02
New Economics Papers: this item is included in nep-dge and nep-ias
Note: 14 pages, Acrobat .pdf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mhet/papers/0012/0012001.pdf (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)
Working Paper: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2000)
Working Paper: 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:wpa:wuwpmh:0012001

Access Statistics for this paper

More papers in Method and Hist of Econ Thought from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).