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Risk Aversion and Expected-Utility Theory: A Calibration Theorem

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  • Matthew Rabin

Abstract

Within the expected-utility framework, the only explanation for risk aversion is that the utility function for wealth is concave: A person has lower marginal utility for additional wealth when she is wealthy than when she is poor. This paper provides a theorem showing that expected-utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes: Within expected-utility theory, for any concave utility function, even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes. Illustrative calibrations are provided. June 2000
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    • Handle: RePEc:ecm:emetrp:v:68:y:2000:i:5:p:1281-1292
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    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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