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Risk attitudes over small and large stakes recalibrated

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  • Eduardo Zambrano

    (Department of Economics, California Polytechnic State University)

Abstract

In this paper I provide bounds on the marginal rate of substitution between losing $x and winning $y, starting from wealth level $w, for a risk averse individual that rejects a small stake gamble for a range of initial wealth levels. I then prove a theorem that can be used to identify the kinds of large stakes that would be rejected by any such individual. The theorems allow us to understand how much risk aversion is embedded in anyone's rejections of certain small stakes gambles and provide tighter connections between the results in Rabin (2000) and the received theory of decision making under risk.

Suggested Citation

  • Eduardo Zambrano, 2019. "Risk attitudes over small and large stakes recalibrated," Working Papers 1906, California Polytechnic State University, Department of Economics.
    • Handle: RePEc:cpl:wpaper:1906
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    File URL: https://www.cob.calpoly.edu/economics/wp-content/uploads/sites/27/2019/11/paper1906.pdf
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    References listed on IDEAS

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    1. Zvi Safra & Uzi Segal, 2008. "Calibration Results for Non-Expected Utility Theories," Econometrica, Econometric Society, vol. 76(5), pages 1143-1166, September.
    2. Cox, James C. & Sadiraj, Vjollca, 2006. "Small- and large-stakes risk aversion: Implications of concavity calibration for decision theory," Games and Economic Behavior, Elsevier, vol. 56(1), pages 45-60, July.
    3. Ariel Rubinstein, 2006. "Dilemmas of an Economic Theorist," Econometrica, Econometric Society, vol. 74(4), pages 865-883, July.
    4. Palacios-Huerta, Ignacio & Serrano, Roberto, 2006. "Rejecting small gambles under expected utility," Economics Letters, Elsevier, vol. 91(2), pages 250-259, May.
    5. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    6. Matthew Rabin & Richard H. Thaler, 2013. "Anomalies: Risk aversion," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 27, pages 467-480, World Scientific Publishing Co. Pte. Ltd..
    7. James Cox & Vjollca Sadiraj & Bodo Vogt & Utteeyo Dasgupta, 2013. "Is there a plausible theory for decision under risk? A dual calibration critique," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(2), pages 305-333, October.
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    More about this item

    Keywords

    Expected Utility Theory; Risk Aversion Calibration;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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