IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size

  • Helga Fehr-Duda

    ()

    (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)

  • Adrian Bruhin

    ()

    (Socioeconomic Institute, University of Zurich)

  • Thomas Epper

    ()

    (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)

  • Renate Schubert

    ()

    (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)

How does risk tolerance vary with stake size? This important question cannot be adequately answered if framing effects, nonlinear probability weighting, and heterogeneity of preference types are neglected. We show that, contrary to gains, no coherent change in relative risk aversion is observed for losses. The increase in relative risk aversion over gains cannot be captured by the curvature of the utility function. It is driven predominantly by a change in probability weighting of a majority group of individuals who exhibit more rational probability weighting at high stakes. These results not only challenge expected utility theory, but also prospect theory.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.soi.uzh.ch/research/wp/2007/wp0708.pdf
File Function: Revised version, 2008
Download Restriction: no

Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0708.

as
in new window

Length: 33 pages
Date of creation: Jul 2007
Date of revision: Feb 2008
Publication status: published in Journal of Risk and Uncertainty 40(2), pp. 147-180, 2010
Handle: RePEc:soz:wpaper:0708
Contact details of provider: Postal: Rämistrasse 71, CH-8006 Zürich
Phone: +41-1-634 21 37
Fax: +41-1-634 49 82
Web page: http://www.soi.uzh.ch/
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Lalive Rafael & Schmutzler Armin, 2008. "Entry in Liberalized Railway Markets: The German Experience," Review of Network Economics, De Gruyter, vol. 7(1), pages 1-16, March.
  2. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June.
  3. Dennis Gaertner & Armin Schmutzler, 2006. "Merger Negotiations and Ex-Post Regret," SOI - Working Papers 0607, Socioeconomic Institute - University of Zurich, revised Dec 2007.
  4. Grisley, William & Kellog, Earl, 1987. "Risk-taking preferences of farmers in northern Thailand: Measurements and implications," Agricultural Economics, Blackwell, vol. 1(2), pages 127-142, June.
  5. Gilles Celeux & Gilda Soromenho, 1996. "An entropy criterion for assessing the number of clusters in a mixture model," Journal of Classification, Springer, vol. 13(2), pages 195-212, September.
  6. Alma Cohen & Liran Einav, 2005. "Estimating Risk Preferences from Deductible Choice," Discussion Papers 04-031, Stanford Institute for Economic Policy Research.
  7. Boes, Stefan & Lipp, Markus & Winkelmann, Rainer, 2007. "Money illusion under test," Economics Letters, Elsevier, vol. 94(3), pages 332-337, March.
  8. Anna Conte & John D Hey & Peter G Moffatt, 2007. "Mixture Models of Choice Under Risk," Discussion Papers 07/06, Department of Economics, University of York.
  9. Grisley, William & Kellog, Earl, 1987. "Risk-Taking Preferences of Farmers in Northern Thailand: Measurements and Implications," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 1(2), June.
  10. Haltiwanger, John C & Waldman, Michael, 1989. "Limited Rationality and Strategic Complements: The Implications for Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 463-83, August.
  11. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  12. Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences.
  13. Daniel Houser & Michael Keane & Kevin McCabe, 2002. "Behavior in a dynamic decision problem: An analysis of experimental evidence using a bayesian type classification algorithm," Experimental 0211001, EconWPA.
  14. Hans Gersbach & Armin Schmutzler, 2006. "A Product-Market Theory of Industry-Specific Training," SOI - Working Papers 0610, Socioeconomic Institute - University of Zurich.
  15. Dennis L. Gärtner & Daniel Halbheer, 2008. "Are There Waves in Merger Activity After All?," Working Papers 0092, University of Zurich, Institute for Strategy and Business Economics (ISU).
  16. Samuel Muehlemann & Juerg Schweri & Rainer Winkelmann & Stefan C. Wolter, 2005. "A Structural Model of Demand for Apprentices," CESifo Working Paper Series 1417, CESifo Group Munich.
  17. Steffen Andersen & Glenn Harrison & Morten Lau & E. Rutström, 2006. "Elicitation using multiple price list formats," Experimental Economics, Springer, vol. 9(4), pages 383-405, December.
  18. Dario Sacco & Armin Schmutzler, 2008. "Competition and Innovation: An Experimental Investigation," SOI - Working Papers 0807, Socioeconomic Institute - University of Zurich.
  19. Sandra Hanslin & Rainer Winkelmann, 2006. "The Apple Falls Increasingly Far: Parent-Child Correlation in Schooling and the Growth of Post-Secondary Education in Switzerland," SOI - Working Papers 0603, Socioeconomic Institute - University of Zurich.
  20. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  21. Stefan Boes & Rainer Winkelmann, 2004. "Income and Happiness: New Results from Generalized Threshold and Sequential Models," SOI - Working Papers 0407, Socioeconomic Institute - University of Zurich.
  22. Hans Gersbach & Armin Schmutzler, 2011. "Foreign direct investment and R&D-offshoring," Oxford Economic Papers, Oxford University Press, vol. 63(1), pages 134-157, January.
  23. Stefan Boes & Rainer Winkelmann, 2006. "The Effect of Income on Positive and Negative Subjective Well-Being," SOI - Working Papers 0605, Socioeconomic Institute - University of Zurich.
  24. Jean-Robert Tyran & Ernst Fehr, 2002. "Limited Rationality and Strategic Interaction - The Impact of the Strategic Environment on Nominal Inertia," University of St. Gallen Department of Economics working paper series 2002 2002-25, Department of Economics, University of St. Gallen.
  25. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  26. Loomes, Graham & Sugden, Robert, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 271-82, April.
  27. Haltiwanger, John & Waldman, Michael, 1985. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," American Economic Review, American Economic Association, vol. 75(3), pages 326-40, June.
  28. Nathalie Etchart-Vincent, 2004. "Is Probability Weighting Sensitive to the Magnitude of Consequences? An Experimental Investigation on Losses," Journal of Risk and Uncertainty, Springer, vol. 28(3), pages 217-235, 05.
  29. Weber, Bethany J. & Chapman, Gretchen B., 2005. "Playing for peanuts: Why is risk seeking more common for low-stakes gambles?," Organizational Behavior and Human Decision Processes, Elsevier, vol. 97(1), pages 31-46, May.
  30. Ernst Fehr & Jean-Robert Tyran, 2005. "Individual Irrationality and Aggregate Outcomes," Discussion Papers 05-09, University of Copenhagen. Department of Economics.
  31. Philippe Mahler & Rainer Winkelmann, 2005. "Single Motherhood and (Un)Equal EducationalOpportunities: Evidence for Germany," SOI - Working Papers 0512, Socioeconomic Institute - University of Zurich.
  32. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
  33. George Wu, 1999. "Anxiety and Decision Making with Delayed Resolution of Uncertainty," Theory and Decision, Springer, vol. 46(2), pages 159-199, April.
  34. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
  35. Bosch-Domenech, Antoni & Silvestre, Joaquim, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Letters, Elsevier, vol. 65(3), pages 265-273, December.
  36. Russell, Thomas & Thaler, Richard, 1985. "The Relevance of Quasi Rationality in Competitive Markets," American Economic Review, American Economic Association, vol. 75(5), pages 1071-82, December.
  37. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
  38. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  39. Thomas Borek & Stefan Buehler & Armin Schmutzler, 2004. "Mergers under Asymmetric Information – Is there a Lemons Problem?," SOI - Working Papers 0408, Socioeconomic Institute - University of Zurich.
  40. Hans Binswanger, 1981. "Attitudes toward risk: Theoretical implications of an experiment in rural india," Artefactual Field Experiments 00010, The Field Experiments Website.
  41. Stefan Boes, 2007. "Count Data Models with Unobserved Heterogeneity: An Empirical Likelihood Approach," SOI - Working Papers 0704, Socioeconomic Institute - University of Zurich.
  42. El-Gamal, Mahmoud A. & Grether, David M., 1995. "Are People Bayesian? Uncovering Behavioral Strategies," Working Papers 919, California Institute of Technology, Division of the Humanities and Social Sciences.
  43. Walther, Herbert, 2003. "Normal-randomness expected utility, time preference and emotional distortions," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 253-266, October.
  44. Lalive, Rafael & Schmutzler, Armin, 2008. "Exploring the effects of competition for railway markets," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 443-458, March.
  45. Kahneman, Daniel & Wakker, Peter P & Sarin, Rakesh, 1997. "Back to Bentham? Explorations of Experienced Utility," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 375-405, May.
  46. Gersbach, Hans & Schmutzler, Armin, 2007. "Does Globalization Create Superstars?," CEPR Discussion Papers 6222, C.E.P.R. Discussion Papers.
  47. Smith, Vernon L & Walker, James M, 1993. "Monetary Rewards and Decision Cost in Experimental Economics," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 245-61, April.
  48. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  49. Beattie, Jane & Loomes, Graham, 1997. "The Impact of Incentives upon Risky Choice Experiments," Journal of Risk and Uncertainty, Springer, vol. 14(2), pages 155-68, March.
  50. Wilcox, Nathaniel T, 1993. "Lottery Choice: Incentives, Complexity and Decision Time," Economic Journal, Royal Economic Society, vol. 103(421), pages 1397-1417, November.
  51. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
  52. Yves Schneider & Peter Zweifel, 2005. "Spatial Effects in Willingness-to-Pay: The Case of Two Nuclear Risks," SOI - Working Papers 0502, Socioeconomic Institute - University of Zurich, revised Sep 2007.
  53. Michel Wedel, 2002. "Concomitant variables in finite mixture models," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 56(3), pages 362-375.
  54. Adrian Bruhin & Helga Fehr-Duda & Thomas Epper, 2010. "Risk and Rationality: Uncovering Heterogeneity in Probability Distortion," Econometrica, Econometric Society, vol. 78(4), pages 1375-1412, 07.
  55. Charles Noussair & Ping Wu, 2006. "Risk tolerance in the present and the future: an experimental study," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(6), pages 401-412.
  56. Mette Wik & Tewodros Aragie Kebede & Olvar Bergland & Stein Holden, 2004. "On the measurement of risk aversion from experimental data," Applied Economics, Taylor & Francis Journals, vol. 36(21), pages 2443-2451.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:soz:wpaper:0708. 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: (Marita Kieser)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.