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Rejecting Small Gambles Under Expected Utility

Listed author(s):
  • Ignacio Palacios-Huerta

    ()

    (Department of Economics, Brown University)

  • Roberto Serrano

    ()

    (Department of Economics, Brown University)

  • Oscar Volij

    ()

    (Department of Economics, Iowa State University)

This paper contributes to an important recent debate around expected utility and risk aversion. Rejecting a gamble over a given range of wealth levels imposes a lower bound on risk aversion. Using this lower bound and empirical evidence on the range of the risk aversion coefficient, we calibrate the relationship between risk attitudes over small-stakes and large-stakes gambles. We find that rejecting small gambles is consistent with expected utility, contrary to a recent literature that concludes that expected utility is fundamentally unfit to explain decisions under uncertainty. Paradoxical behavior is only obtained when calibrations are made in a region of the parameter space that is not empirically relevant.

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File URL: http://www.sss.ias.edu/publications/papers/econpaper32.pdf
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Paper provided by Institute for Advanced Study, School of Social Science in its series Economics Working Papers with number 0032.

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Length: 21 pages
Date of creation: May 2003
Handle: RePEc:ads:wpaper:0032
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