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Observing Different Orders of Risk Aversion

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  • Loomes, Graham
  • Segal, Uzi

Abstract

A decision maker's attitude towards risk is said to be of order (i), (i) = 1, 2, if for every given risk (e) with expected value zero, the risk premium the decision maker is willing to pay to avoid the risk (te) goes with (t) to zero at the same order as t[superscript i]. This article presents an experiment testing the order of decision makers' attitudes toward risk. Its major result is that both attitudes exist, each in significant proportions. Moreover, two classes of first-order behavior are defined. The rank-dependent model (Quiggin, 1982) belongs to one, the disappointment aversion model (Gul, 1991) to the other. We show that only the first of these two classes appears among our subjects. Copyright 1994 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 9 (1994)
Issue (Month): 3 (December)
Pages: 239-56

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Handle: RePEc:kap:jrisku:v:9:y:1994:i:3:p:239-56

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Web page: http://www.springerlink.com/link.asp?id=100299

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Cited by:
  1. Livio Stracca, 2002. "Behavioural Finance and Aggregate Market Behaviour: Where do we Stand?," Discussion Papers in Economics 02/10, Department of Economics, University of Leicester.
  2. Rabin, Matthew, 2000. "Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion," Department of Economics, Working Paper Series qt61d7b4pg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Palacios-Huerta, Ignacio & Serrano, Roberto, 2006. "Rejecting small gambles under expected utility," Economics Letters, Elsevier, vol. 91(2), pages 250-259, May.
  4. Sujoy Mukerji & Peter Klibanoff, 2002. "A Smooth Model of Decision,Making Under Ambiguity," Economics Series Working Papers 113, University of Oxford, Department of Economics.
  5. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley.
  6. Machina, Mark J, 2000. "Payoff Kinks in Preferences Over Lotteries," University of California at San Diego, Economics Working Paper Series qt7vn7d2hs, Department of Economics, UC San Diego.
  7. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter.
  8. F. McElroy, 2007. "“Probability of risk aversion” and other applications of derivatives of the certainty equivalent," International Review of Economics, Springer, vol. 54(4), pages 429-444, December.
  9. Ang, Andrew & Bekaert, Geert & Liu, Jun, 2005. "Why stocks may disappoint," Journal of Financial Economics, Elsevier, vol. 76(3), pages 471-508, June.
  10. Helga Fehr-Duda & Thomas Epper, 2012. "Probability and Risk: Foundations and Economic Implications of Probability-Dependent Risk Preferences," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 567-593, 07.
  11. Zvi Safra & Uzi Segal, 2001. "On the Economic Meaning of Machina's Frâ„chet Differentiability Assumption," Boston College Working Papers in Economics 511, Boston College Department of Economics.
  12. Abdellaoui, Mohammed & Bleichrodt, Han, 2007. "Eliciting Gul's theory of disappointment aversion by the tradeoff method," Journal of Economic Psychology, Elsevier, vol. 28(6), pages 631-645, December.

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