Risk Aversion and Expected Utility Theory: A Calibration Theorem
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.)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- L. Epstein & S. Zin, 2010.
"First order risk aversion and the equity premium puzzle,"
Levine's Working Paper Archive
1400, David K. Levine.
- Epstein, Larry G. & Zin, Stanley E., 1990. "'First-order' risk aversion and the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 387-407, December.
- Mankiw, N. Gregory & Zeldes, Stephen P., 1991.
"The consumption of stockholders and nonstockholders,"
Journal of Financial Economics,
Elsevier, vol. 29(1), pages 97-112, March.
- N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
- Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
- Hellwig Martin F., 1995. "The Assessment of Large Compounds of Independent Gambles," Journal of Economic Theory, Elsevier, vol. 67(2), pages 299-326, December.
- Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
- Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
- Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November.
- David Bowman & Deborah Minehart & Matthew Rabin, 1994.
"Loss aversion in a consumption/savings model,"
International Finance Discussion Papers
492, Board of Governors of the Federal Reserve System (U.S.).
- Shlomo Benartzi & Richard H. Thaler, 1993.
"Myopic Loss Aversion and the Equity Premium Puzzle,"
NBER Working Papers
4369, National Bureau of Economic Research, Inc.
- Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
- Uzi Segal & Avia Spivak, 1988.
"First Order Versus Second Order Risk Aversion,"
UCLA Economics Working Papers
540, UCLA Department of Economics.
- Graham Loomes & Uzi Segal, .
"Observing Different Orders of Risk Aversion,"
92/5, Department of Economics, University of York.
- Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
- Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-97, December.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Kandel, S. & Stambaugh, R.F., 1990. "Asset Returns, Investment Horizons, And Intertemporal Preferences," Weiss Center Working Papers 7-90, Wharton School - Weiss Center for International Financial Research.
- Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
When requesting a correction, please mention this item's handle: RePEc:cla:levarc:7667. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine)
If references are entirely missing, you can add them using this form.