Small- and Large-Stakes Risk Aversion: Implications of Concavity Calibration for Decision Theory

32 Pages Posted: 10 Apr 2006

See all articles by James C. Cox

James C. Cox

Georgia State University - Department of Economics

Vjollca Sadiraj

Georgia State University - Department of Economics

Date Written: June 2005

Abstract

A growing literature reports the conclusions that: (a) expected utility theory does not provide a plausible theory of risk aversion for both small-stakes and large-stakes gambles; and (b) this decision theory should be replaced with an alternative theory characterized by loss aversion. This paper explains that the arguments in previous literature fail to support these conclusions. Either concavity calibration has no general implication for expected utility theory or it has problematic implications for all decision theories that involve concave transformations (utility or value functions) of positive money payoffs, which makes loss aversion irrelevant to the argument.

Keywords: concavity calibration, expected utility theory, prospect theory, risk aversion

JEL Classification: C90, D81

Suggested Citation

Cox, James C. and Sadiraj, Vjollca, Small- and Large-Stakes Risk Aversion: Implications of Concavity Calibration for Decision Theory (June 2005). Andrew Young School of Policy Studies Research Paper Series No. 06-40, Available at SSRN: https://ssrn.com/abstract=895714 or http://dx.doi.org/10.2139/ssrn.895714

James C. Cox (Contact Author)

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States
404-651-8888 (Phone)
404-651-0425 (Fax)

Vjollca Sadiraj

Georgia State University - Department of Economics ( email )

P.O. Box 3992
Atlanta, GA 30302-3992
United States

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