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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

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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) Downloads
Journal Article: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2000)
Working Paper: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2000) Downloads
Working Paper: Risk Aversion and Expected-Utility Theory: A Calibration Theorem (2000) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpmh:0012001

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