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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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Bibliographic Info

Paper provided by University of Gothenburg, 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
Date of revision:
Handle: RePEc:hhs:gunwpe:0351

Contact details of provider:
Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, 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;

Other versions of this item:

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

This paper has been announced in the following NEP Reports:

• NEP-ALL-2009-04-18 (All new papers)
• NEP-LTV-2009-04-18 (Unemployment, Inequality & Poverty)
• NEP-UPT-2009-04-18 (Utility Models & Prospect Theory)

References

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25. repec:aea:jeclit:v:43:y:2005:i:2:p:488-497 is not listed on IDEAS

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Cited by:

1. Kerri Brick & Martine Visser & Justine Burns, 2011. "Risk Aversion: Experimental Evidence from South African Fishing Communities," Working Papers 227, Economic Research Southern Africa.
   
   • Kerri Brick & Martine Visser & Justine Burns, 2012. "Risk Aversion: Experimental Evidence from South African Fishing Communities," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 133-152.
2. Johansson-Stenman, Olof, 2009. "Risk Aversion and Expected Utility of Consumption over Time," Working Papers in Economics 351, University of Gothenburg, Department of Economics.
   
   • Johansson-Stenman, Olof, 2010. "Risk aversion and expected utility of consumption over time," Games and Economic Behavior, Elsevier, vol. 68(1), pages 208-219, January.
3. Andersson, Fredrik W., 2011. "The lambda model and "rule of thumb" consumers: An estimation problem in existing studies," The Journal of Socio-Economics, Elsevier, vol. 40(4), pages 381-384, August.

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