Risk Attitudes Over Small and Large Stakes Recalibrated

Abstract

In this paper I prove a theorem that establishes bounds on the marginal rate of substitution between losing $x and winning $y, starting from wealth level $w for a risk averse individual that rejects a small stake gamble for a range of initial wealth levels. I am then able to prove a theorem that can identify the kinds of large stakes that would be rejected by any such individual. The theorems allow us to understand how much risk aversion is embedded in anyone’s rejections of certain small stakes gambles and provide tighter connections between the results in Rabin (2000) and the received theory of decision making under risk.

Keywords: Expected Utility Theory, Risk Aversion Calibration

JEL Classification: D81