Risk Aversion and Expected-Utility Theory: A Calibration Exercise

17 Pages Posted: 20 Apr 2005

See all articles by Laura Schechter

Laura Schechter

University of Wisconsin at Madison - Agricultural and Applied Economics; University of Wisconsin at Madison - Economics

Date Written: December 19, 2006

Abstract

Rabin (2000) argues that, under expected-utility, observed risk aversion over modest stakes implies extremely high risk aversion over large stakes. Cox & Sadiraj (2006) have replied that this is a problem of expected-utility of wealth, but that expected-utility of income does not share that problem. We combine experimental data on moderate-scale risky choices with survey data on income to estimate coefficients of relative risk aversion using expected-utility of consumption. Assuming individuals cannot save implies an average coefficient of relative risk aversion of 1.92. Assuming they can decide between consuming today and saving for the future, a realistic assumption, implies quadruple-digit coefficients. This gives empirical evidence for narrow bracketing.

Keywords: Risk aversion, experiment, Paraguay

JEL Classification: C93, D80, O10

Suggested Citation

Schechter, Laura, Risk Aversion and Expected-Utility Theory: A Calibration Exercise (December 19, 2006). Available at SSRN: https://ssrn.com/abstract=702562 or http://dx.doi.org/10.2139/ssrn.702562

Laura Schechter (Contact Author)

University of Wisconsin at Madison - Agricultural and Applied Economics ( email )

427 Lorch St.
Madison, WI 53706-1503
United States

HOME PAGE: http://aae.wisc.edu/lschechter

University of Wisconsin at Madison - Economics ( email )

Madison, WI
United States

HOME PAGE: http://aae.wisc.edu/lschechter

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