Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
Anomalies: Risk Aversion
Journal of Economic Perspectives
vol. 15,
no. 1, Winter 2001
(pp. 219–232)
(Complimentary)
Abstract
Economists ubiquitously employ a simple and elegant explanation for risk aversion: It derives from the concavity of the utility-of-wealth function within the expected-utility framework. We show that this explanation is not plausible in most applications, since anything more than economically negligible risk aversion over moderate stakes requires a utility-of-wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes. We present examples of how the expected-utility framework has misled economists, and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting.Citation
Rabin, Matthew, and Richard H. Thaler. 2001. "Anomalies: Risk Aversion." Journal of Economic Perspectives, 15 (1): 219–232. DOI: 10.1257/jep.15.1.219JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
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