Risk Aversion as Attitude towards Probabilities: A Paradox
AbstractTheories of decision under risk that challenge expected utility theory model risk attitudes at least partly with transformation of probabilities. We explain how attributing risk aversion (partly or wholly) to attitude towards probabilities, can produce extreme probability distortions that imply paradoxical risk aversion.
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Bibliographic InfoPaper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2011-10.
Date of creation: Jun 2011
Date of revision:
risk aversion; probability transformation; calibration; reference dependence; loss aversion;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-13 (All new papers)
- NEP-EVO-2011-07-13 (Evolutionary Economics)
- NEP-EXP-2011-07-13 (Experimental Economics)
- NEP-MIC-2011-07-13 (Microeconomics)
- NEP-UPT-2011-07-13 (Utility Models & Prospect Theory)
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