# 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) Track citations by RSS feed

**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 ().