Risk Attitudes Over Small and Large Stakes Recalibrated
9 Pages Posted: 4 Mar 2019
Date Written: February 11, 2019
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
Suggested Citation: Suggested Citation