Anomalies: Risk Aversion
Economists ubiquitously employ a simple and elegant explanation for risk aversion: It derives from the concavity of the utility-of-wealth function within the expected-utility framework. We show that this explanation is not plausible in most applications, since anything more than economically negligible risk aversion over moderate stakes requires a utility-of-wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes. We present examples of how the expected-utility framework has misled economists, and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting.
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Volume (Year): 15 (2001)
Issue (Month): 1 (Winter)
Pages: 219-232
| Handle: | RePEc:aea:jecper:v:15:y:2001:i:1:p:219-232 |
| Note: | DOI: 10.1257/jep.15.1.219 |
| Contact details of provider: | Web page: https://www.aeaweb.org/jep/ Email: More information through EDIRC
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References listed on IDEAS
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