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Risk aversion and expected-utility theory: A calibration exercise

  • Laura Schechter


Rabin (Econometrica 68(5):1281–1292, 2000 ) argues that, under expected-utility, observed risk aversion over modest stakes implies extremely high risk aversion over large stakes. Cox and Sadiraj (Games Econom. Behav. 56(1):45–60, 2006 ) have replied that this is a problem of expected-utility of wealth, but that expected-utility of income does not share that problem. We combine experimental data on moderate-scale risky choices with survey data on income to estimate coefficients of relative risk aversion using expected-utility of consumption. Assuming individuals cannot save implies an average coefficient of relative risk aversion of 1.92. Assuming they can decide between consuming today and saving for the future, a realistic assumption, implies quadruple-digit coefficients. This gives empirical evidence for narrow bracketing. Copyright Springer Science+Business Media, LLC 2007

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Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 35 (2007)
Issue (Month): 1 (August)
Pages: 67-76

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Handle: RePEc:kap:jrisku:v:35:y:2007:i:1:p:67-76
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  1. James C. Cox & Vjollca Sadiraj, . "Small- and Large-Stakes Risk Aversion: Implications of Concavity Calibration for Decision Theory," Experimental Economics Center Working Paper Series 2006-03, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  2. Matthew Rabin, 2001. "Risk Aversion and Expected Utility Theory: A Calibration Theorem," Levine's Working Paper Archive 7667, David K. Levine.
  3. Laura Schechter, 2005. "Traditional trust measurement and the risk confound: An experiment in rural paraguay," Artefactual Field Experiments 00106, The Field Experiments Website.
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  17. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter.
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