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Expected utility: a defense

Author

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  • Stephen LeRoy

    (University of California, Santa Barbara)

Abstract

In recent papers Matthew Rabin and Richard H. Thaler have argued that expected utility theory generates implausible predictions about individuals' attitudes toward small vs. large risks. Specifically, these authors argued that expected utility theory, plus the assertion that individuals reject small risks that are actuarially unfavorable, implies that agents should reject large risks which in fact they would accept. In this paper we question the presumption that the small risks are in fact rejected: they have risk-return characteristics that are superior to those of the daily returns on common stocks, which individuals generally find acceptable.

Suggested Citation

  • Stephen LeRoy, 2003. "Expected utility: a defense," Economics Bulletin, AccessEcon, vol. 7(7), pages 1-3.
    • Handle: RePEc:ebl:ecbull:eb-03g00009
    as

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    References listed on IDEAS

    as
    1. Richard Watt, 2002. "Defending Expected Utility Theory: Comment," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 227-229, Spring.
    2. Palacios-Huerta, Ignacio & Serrano, Roberto, 2006. "Rejecting small gambles under expected utility," Economics Letters, Elsevier, vol. 91(2), pages 250-259, May.
    3. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
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    JEL classification:

    • G0 - Financial Economics - - General
    • D0 - Microeconomics - - General

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