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Calibration without reduction for non-expected utility

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  • Freeman, David

Abstract

Calibration results in Rabin (2000) and Safra and Segal (2008, 2009) suggest that both expected and non-expected utility theories cannot produce non-negligible risk aversion over small stakes without producing implausible risk aversion over large stakes. This paper provides calibration results for recursive non-expected utility theories that relax the Reduction of Compound Lotteries axiom (as in Segal, 1990). These calibration results imply that a broad class of non-expected utility theories can accommodate both small and large stakes risk aversion, even for a decision-maker who faces background risk.

Suggested Citation

  • Freeman, David, 2015. "Calibration without reduction for non-expected utility," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 21-32.
  • Handle: RePEc:eee:jetheo:v:158:y:2015:i:pa:p:21-32
    DOI: 10.1016/j.jet.2015.03.007
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    1. Dillenberger, David, 2008. "Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior," MPRA Paper 8342, University Library of Munich, Germany.
    2. David Dillenberger, 2010. "Preferences for One‐Shot Resolution of Uncertainty and Allais‐Type Behavior," Econometrica, Econometric Society, vol. 78(6), pages 1973-2004, November.
    3. Segal, Uzi, 1990. "Two-Stage Lotteries without the Reduction Axiom," Econometrica, Econometric Society, vol. 58(2), pages 349-377, March.
    4. Zvi Safra & Uzi Segal, 2008. "Calibration Results for Non-Expected Utility Theories," Econometrica, Econometric Society, vol. 76(5), pages 1143-1166, September.
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    21. Zvi Safra & Uzi Segal, 2009. "Risk aversion in the small and in the large: Calibration results for betweenness functionals," Journal of Risk and Uncertainty, Springer, vol. 38(1), pages 27-37, February.
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    26. Carlin, Paul S., 1992. "Violations of the reduction and independence axioms in Allais-type and common-ratio effect experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 19(2), pages 213-235, October.
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    Cited by:

    1. Han Bleichrodt & Jason N. Doctor & Yu Gao & Chen Li & Daniella Meeker & Peter P. Wakker, 2019. "Resolving Rabin’s paradox," Journal of Risk and Uncertainty, Springer, vol. 59(3), pages 239-260, December.
    2. Balter, Anne G. & Chau, Ki Wai & Schweizer, Nikolaus, 2022. "Rabin’s calibration theorem revisited," Economics Letters, Elsevier, vol. 210(C).
    3. Freeman, David, 2017. "Risk taking with background risk under recursive rank-dependent utility," Mathematical Social Sciences, Elsevier, vol. 87(C), pages 72-74.

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    More about this item

    Keywords

    Risk aversion; Calibration; Non-expected utility theories; Recursive preferences;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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