Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5062354 | Economics Letters | 2006 | 10 Pages |
Abstract
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.
Related Topics
Social Sciences and Humanities
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Economics and Econometrics
Authors
Ignacio Palacios-Huerta, Roberto Serrano,