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Risk Aversion and Expected Utility of Consumption over Time

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Author Info
Johansson-Stenman, Olof () (Department of Economics, School of Business, Economics and Law, Göteborg University)

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Abstract

The calibration theorem by Rabin (2000) implies that seemingly plausible smallstake choices under risk imply implausible large-stake risk aversion. This theorem is derived based on the expected utility of wealth model. However, Cox and Sadiraj (2006) show that such implications do not follow from the expected utility of income model. One may then wonder about the implications for more applied consumption analysis. The present paper therefore expresses utility as a function of consumption in a standard life cycle model, and illustrates the implications of this model with experimental small- and intermediate-stake risk data from Holt and Laury (2002). The results suggest implausible risk aversion parameters as well as unreasonable implications for long term risky choices. Thus, the conventional intertemporal consumption model under risk appears to be inconsistent with the data.

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File URL: http://hdl.handle.net/2077/19795
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Publisher Info
Paper provided by Göteborg University, Department of Economics in its series Working Papers in Economics with number 351.

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Length: 39 pages
Date of creation: 06 Apr 2009
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Handle: RePEc:hhs:gunwpe:0351

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Postal: Department of Economics, School of Business, Economics and Law, Göteborg University Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Related research
Keywords: Expected utility of income; expected utility of final wealth; dynamic consumption theory; asset integration; time inconsistency; narrow bracketing;

Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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