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Rabin's paradox for health outcomes

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  • Stefan A. Lipman
  • Arthur E. Attema

Abstract

Many health economic studies assume expected utility maximisation, with typically a concave utility function to capture risk aversion. Given these assumptions, Rabin's paradox (RP) involves preferences over mixed gambles yielding moderate outcomes, where turning down such gambles imply absurd levels of risk aversion. Although RP is considered a classic critique of expected utility, no paper has as of yet fully tested its preferences within individuals. In an experiment we report a direct test of RP in the health domain, which was previously only considered in the economic literature, showing it may have pervasive implications here too. Our paper supports the shift towards alternative, empirically valid models, such as prospect theory, also in the health domain. These alternative models are able to accommodate Rabin's paradox by allowing reference‐dependence and loss aversion.

Suggested Citation

  • Stefan A. Lipman & Arthur E. Attema, 2019. "Rabin's paradox for health outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 28(8), pages 1064-1071, August.
  • Handle: RePEc:wly:hlthec:v:28:y:2019:i:8:p:1064-1071
    DOI: 10.1002/hec.3918
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    References listed on IDEAS

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    1. Chris Sampson’s journal round-up for 5th August 2019
      by Chris Sampson in The Academic Health Economists' Blog on 2019-08-05 11:00:57

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