Probabilistic Risk Attitudes and Local Risk Aversion: a Paradox
AbstractProminent theories of decision under risk that challenge expected utility theory model risk attitudes at least partly with transformation of probabilities. This paper shows how attributing local risk aversion (partly or wholly) to attitudes 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 2012-07.
Date of creation: May 2012
Date of revision:
risk aversion; probability transformation; calibration;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-EXP-2012-05-15 (Experimental Economics)
- NEP-MIC-2012-05-15 (Microeconomics)
- NEP-UPT-2012-05-15 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
- Handa, Jagdish, 1977. "Risk, Probabilities, and a New Theory of Cardinal Utility," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 97-122, February.
- Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & E. Elisabet RutstrÃ¶m & Vjollca Sadiraj, 2012.
"Asset Integration and Attitudes to Risk: Theory and Evidence,"
Experimental Economics Center Working Paper Series
2012-12, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
- Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem & Vjollca Sadiraj, 2011. "Asset Integration and Attitudes to Risk: Theory and Evidence," Working Papers 2011_10, Durham University Business School.
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