Risk aversion and expected utility of consumption over time
(2010) In Games and Economic Behavior 68(1). p.208219 Abstract
 The calibration theorem by Rabin [Rabin, M., 2000a. Risk aversion and expected utility theory: A calibration theorem. Econometrica 68, 12811292; Rabin, M., 2000b. Diminishing marginal utility of wealth cannot explain risk aversion. In: Kahneman, D., Tversky, A. (Eds.), Choices, Values and Frames. Cambridge University Press] implies that seemingly plausible smallstake choices under risk imply implausible largestake risk aversion. This theorem is derived based on the expected utility of wealth model. However, Cox and Sadiraj [Cox, J.C., Sadiraj, V., 2006. Small and largestakes risk aversion: Implications of concavity calibration for decision theory. Games Econ. Behav. 56, 4560] show that such implications do not follow from the... (More)
 The calibration theorem by Rabin [Rabin, M., 2000a. Risk aversion and expected utility theory: A calibration theorem. Econometrica 68, 12811292; Rabin, M., 2000b. Diminishing marginal utility of wealth cannot explain risk aversion. In: Kahneman, D., Tversky, A. (Eds.), Choices, Values and Frames. Cambridge University Press] implies that seemingly plausible smallstake choices under risk imply implausible largestake risk aversion. This theorem is derived based on the expected utility of wealth model. However, Cox and Sadiraj [Cox, J.C., Sadiraj, V., 2006. Small and largestakes risk aversion: Implications of concavity calibration for decision theory. Games Econ. Behav. 56, 4560] show that such implications do not follow from the expected utility of income model. One may then wonder about the implications for more applied consumption analysis. The present paper therefore expresses utility as a function of consumption in a standard life cycle model, and illustrates the implications of this model with experimental small and intermediatestake risk data from Holt and Laury [Holt, C.A., Laury, S.K., 2002. Risk aversion and incentive effects. Amer. Econ. Rev. 92, 16441655]. The results suggest implausible risk aversion parameters as well as unreasonable implications for longterm risky choices. Thus, the conventional intertemporal consumption model under risk appears to be inconsistent with the data. (C) 2009 Elsevier Inc. All rights reserved. (Less)
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http://lup.lub.lu.se/record/4448883
 author
 JohanssonStenman, O
 publishing date
 2010
 type
 Contribution to journal
 publication status
 published
 subject
 keywords
 Expected utility of income, Expected utility of final wealth, Dynamic consumption theory, Asset integration, Time inconsistency, Narrow bracketing
 in
 Games and Economic Behavior
 volume
 68
 issue
 1
 pages
 208  219
 publisher
 08998256
 external identifiers

 scopus:72049088525
 ISSN
 08998256
 DOI
 10.1016/j.geb.2009.07.001
 project
 BECC
 language
 English
 LU publication?
 no
 id
 054cdb027eac4554a1a7ae7f7bcda45a (old id 4448883)
 date added to LUP
 20140523 12:11:37
 date last changed
 20180107 07:05:53
@article{054cdb027eac4554a1a7ae7f7bcda45a, abstract = {The calibration theorem by Rabin [Rabin, M., 2000a. Risk aversion and expected utility theory: A calibration theorem. Econometrica 68, 12811292; Rabin, M., 2000b. Diminishing marginal utility of wealth cannot explain risk aversion. In: Kahneman, D., Tversky, A. (Eds.), Choices, Values and Frames. Cambridge University Press] implies that seemingly plausible smallstake choices under risk imply implausible largestake risk aversion. This theorem is derived based on the expected utility of wealth model. However, Cox and Sadiraj [Cox, J.C., Sadiraj, V., 2006. Small and largestakes risk aversion: Implications of concavity calibration for decision theory. Games Econ. Behav. 56, 4560] show that such implications do not follow from the expected utility of income model. One may then wonder about the implications for more applied consumption analysis. The present paper therefore expresses utility as a function of consumption in a standard life cycle model, and illustrates the implications of this model with experimental small and intermediatestake risk data from Holt and Laury [Holt, C.A., Laury, S.K., 2002. Risk aversion and incentive effects. Amer. Econ. Rev. 92, 16441655]. The results suggest implausible risk aversion parameters as well as unreasonable implications for longterm risky choices. Thus, the conventional intertemporal consumption model under risk appears to be inconsistent with the data. (C) 2009 Elsevier Inc. All rights reserved.}, author = {JohanssonStenman, O}, issn = {08998256}, keyword = {Expected utility of income,Expected utility of final wealth,Dynamic consumption theory,Asset integration,Time inconsistency,Narrow bracketing}, language = {eng}, number = {1}, pages = {208219}, publisher = {08998256}, series = {Games and Economic Behavior}, title = {Risk aversion and expected utility of consumption over time}, url = {http://dx.doi.org/10.1016/j.geb.2009.07.001}, volume = {68}, year = {2010}, }