Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size
Working Paper No. 413
34 Pages Posted: 9 Jun 2009
Date Written: May 2009
Abstract
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 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. Contrary to gains, no coherent change in relative risk aversion is observed for losses. These results not only challenge expected utility theory, but also prospect theory.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Risk and Rationality: Uncovering Heterogeneity in Probability Distortion
By Adrian Bruhin, Helga Fehr-duda, ...
-
A Note on Skewness Seeking: An Experimental Analysis
By Tobias Bruenner, Rene Levinsky, ...
-
Uncertainty Breeds Decreasing Impatience: The Role of Risk Preferences in Time Discounting
By Thomas Epper, Helga Fehr-duda, ...
-
The Hold-Up Problem: Why It Is Urgent to Rethink the Economics of Disaster Insurance Protection
-
Interpreting Time Horizon Effects in Inter-Temporal Choice
By Thomas J. Dohmen, Armin Falk, ...
-
Interpreting Time Horizon Effects in Inter-Temporal Choice
By Thomas J. Dohmen, Armin Falk, ...
-
Entry into Entrepreneurship: Risk Loving, Optimism or Overweighting of Small Probabilities?
By Thomas B. Astebro, José Mata, ...
-
The Missing Link: Unifying Risk Taking and Time Discounting
By Thomas Epper and Helga Fehr-duda
-
Detecting Heterogeneous Risk Attitudes with Mixed Gambles
By Luís Santos-pinto, Adrian Bruhin, ...
-
By Olivier Toubia, Eric J. Johnson, ...